What Is Option-Adjusted Spread (OAS)?
Option-adjusted spread (OAS) is a metric used in finance to measure the relative value of a bond or loan against its alternatives. OAS takes into account the embedded options in the security, such as the ability to redeem early or change the interest rate. A higher OAS indicates that a security is more expensive and has more embedded options, while a lower OAS indicates a less expensive security with fewer embedded options.
The calculation can be used to compare different securities or to see how an embedded option affects the value of a security. For example, imagine two bonds with similar credit ratings but different yields. The bond with the higher yield would be considered more risky and would have a higher OAS.