OAS (Option-Adjusted Spread)
The pure credit spread of a bond after stripping out embedded option value (calls, puts, etc.). An essential tool for comparing complex structured bonds like AT1s and callables.
Why 'Adjust for Options'?
Callable bonds contain an embedded option allowing the issuer to redeem before maturity. AT1 bonds (Additional Tier 1) are prototypical callables. In this case, simple Z-spread measures mix option value with credit spread, overstating or understating pure credit risk.
OAS separates and removes option value to isolate the "pure credit spread." Technically, it uses an interest rate tree to simulate option exercise probabilities across multiple rate paths and subtracts the expected option value.
In practice, OAS enables apples-to-apples comparison across bonds with different option structures. When markets rapidly repriced AT1 spreads following the Credit Suisse crisis (2023), OAS was the reference measure.
Z-Spread, OAS, and I-Spread — The Differences
Three spread measures use different calculation methods and suit different situations.
I-Spread (Interpolated Spread): Simple difference vs. the swap rate at the same maturity. Fastest to calculate but only appropriate for plain vanilla bonds. Z-Spread (Zero-Volatility Spread): The parallel shift added to the entire zero curve. Adjusts discount rates at each coupon payment date. Suitable for relative value analysis of non-option bonds. OAS (Option-Adjusted Spread): Z-spread minus embedded option value. Appropriate for callable, puttable, AT1, and other option-embedded bonds.
For FIG bonds — especially AT1, CoCo, and Tier 2 — OAS is an indispensable analytical tool.
Key Terms
The parallel shift added across the entire yield curve. Used for relative value comparison of non-option bonds.
A bond the issuer can redeem before maturity on specified call dates. AT1 is the prototypical example.
Where This Concept Appears
Learning Paths
Related Concepts
Spread & Basis
How much higher a bond's yield is versus the risk-free benchmark. This spread encapsulates the market's credit and liquidity assessment of the issuer.
AT1 — Additional Tier 1 Capital
A regulatory capital instrument ranking just above CET1. It trades like a bond but is legally capital.
CoCo — Contingent Convertible Bond
A bond-like capital instrument that automatically absorbs losses when a trigger is hit. AT1 is the most common type.
The DCM Ecosystem Map
The global bond market is worth over $130 trillion — larger than equities. Yet many of the biggest buyers aren't here for yield. Understanding DCM starts with this paradox: a complete map of the issuer–investor–investment bank triangle.