New answers tagged fixed-income
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The Z Spread is the constant spread above the treasury curve that compensates the bond holder for credit, liquidity and option risk.
The Option Adjusted spread is simply the Z- Spread excluding the premium to compensate for the option risk.
Thus, the OAS is the spread above the treasury curve that compensates for credit and liquidity risk only.
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The question remains unanswered...
What you basically state by OAS = z - o is that OAS is less than the z-spread for callable bonds. Now if you compute the PV of the bond by discounting it by respective yields (Treasury yield + spread) you will find that the the bond discounted using the z-spread will be cheaper than the one discounted by OAS. It does not ...
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This is wrong:
effectiveDate / Valuation_date = 10 May 2014
Good that you included the ISIN, which states that the effective date (as contrasted with the issue date) was a few days after 03 May 2013.
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Let's approximate the time to maturity to be 3 years and 10 months. Assume that coupon is paid on March 6 each year. Let face value $F=100$ and coupon $c=0.07375F$. Let the discount factor be $d(0,T)=e^{−r T}$ where $r=0.06535$. The price of the bond is
$$ce^{−10/12 \bullet r}+ce^{−22/12 \bullet r}+ce^{−34/12 \bullet r}+(F+c)e^{−46/12 \bullet r}=103.24 \; ...
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