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Introduction to Option Adjusted Spread Analysis, Third Edition Revised by Tom Miller, based on an earlier edition written by Tom Windas NEW YORK: Bloomberg Press, 2007
Thirty years ago, bonds were quoted by coupon and yield to maturity, with the latter widely regarded as a de facto total return expectation. But then new types of bonds emerged, such as callables and putables, and later mortgage-backed securities, that required new methods to measure risk and return - particularly when those securities contained embedded options. One of those methods is "option-adjusted spread analysis" or "OAS analysis, which is used to measure the value inherent in a bond's cash flow and also the value of the bond's embedded options, and then to compare the results to market reference levels. Part One of the book is entitled "Yield Analysis versus OAS Analysis." Chapter 1, "Fatal Flaws in Traditional Yield Calculations," explains yield analysis and identifies how and why employing it on non-bullet bonds (bonds whose...