Option-Adjusted Spread (OAS)
The yield spread of a bond over a benchmark rate, adjusted to remove the value of any embedded options such as call or put provisions.
What is Option-Adjusted Spread?
The option-adjusted spread (OAS) is a measure of the yield advantage that a bond offers over a risk-free benchmark rate (typically a Treasury curve), after mathematically removing the value of any embedded options—such as call provisions, put provisions, or prepayment options in mortgage-backed securities. Because embedded options affect cash flow timing and create uncertainty about the bond's actual yield, the OAS strips out the option component to provide a cleaner comparison of credit and liquidity risk across bonds with different option structures. A higher OAS indicates greater compensation for risk; bonds with the same OAS offer equivalent risk-adjusted value. OAS is widely used to evaluate callable corporate bonds, mortgage-backed securities, and agency bonds.
Example
A callable corporate bond yields 5.80% with the market's option-adjusted spread model valuing the embedded call option at 30 basis points. The OAS = 5.80% − 4.50% (Treasury) − 0.30% (option value) = 100 basis points. An otherwise identical non-callable bond with OAS of 120 basis points offers greater compensation for credit risk; the callable bond is cheaper on an option-adjusted basis.
Source: CFA Institute — Fixed Income: Valuation and Risk Models