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Using zero coupon Treasury curve, I discounted a 10% coupon bond. Using the same curve, I discounted a 5% coupon bond. Both these bonds have the same maturity. Since I discount both these bonds using the same curve, I should get two yields where the difference reflects the coupon effect.

I put in these two yields into Bloomberg and theoretically the OAS on both of them should match but it doesn't. Shouldn't the OAS match because the coupon effect is already accounted for. What would them be different?

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  • $\begingroup$ The OAS is option adjusted spread - so these bonds feature optionalities? $\endgroup$ – Kermittfrog Apr 25 at 8:58
  • $\begingroup$ These are Treasury bonds with no optionality $\endgroup$ – VanillaCall Apr 25 at 11:30
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    $\begingroup$ Are the curves used to do the initial PV and the OAS 100% consistent, including discount rate, day count convention, compounding convention, etc.? $\endgroup$ – Helin Apr 27 at 0:04
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    $\begingroup$ There was an issue with my day count. I was using ACT/360 instead of ACT/ACT for bonds. This worked. In addition, I can also use par rate curve to discount my cash flows since the par curve captures the coupon effects. So any spread to the par curve is coupon adjusted as well $\endgroup$ – VanillaCall May 9 at 19:29
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The pricing could be different for other reasons. For example, a 10 year bond issued this week will likely be more liquidity traded than a 30 year bond issued 20 years ago. The newly issued bond may have a liquidity premium.

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  • $\begingroup$ I'm discounting both bonds using the same zero Treasury coupon curve though so the only difference between them is really the coupon itself. $\endgroup$ – VanillaCall Apr 26 at 15:37
  • $\begingroup$ When you discount them using that curve, are you able to match the market price? $\endgroup$ – Charles Fox Apr 26 at 17:01
  • $\begingroup$ Yes, I'm able to match the market price.. $\endgroup$ – VanillaCall Apr 26 at 20:28

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