Options Adjusted Spread

The Option-Adjusted Spread (OAS) is the measurement of the spread of fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. Representing the spread after adjusting for, or removing, the bond’s option, OAS converts the difference between the fair price and the market price of a fixed income security, typically a bond or a mortgage-backed security (MBS), into yield and calculates a spread that makes the two prices equal. Investors also use the OAS to compare one MBS to another MBS to decide which is the better potential investment. The OAS method is more accurate than simply comparing a bond’s yield to maturity to a benchmark.