### OAS measure of yield

OAS measure of yield has been introduced to accurately price callable

bonds but is also used now as a measure for bullets' yield.

1. For bullets, it is more accurate than yield to maturity (YTM) as

a. You use implied forward rates instead of the yield to maturity as

a reinvestment rate.

b. You discount using the zero cpn curve instead of the YTM

Even more, you calibrate your forward rates so that the PV of yor

coupons match the market values.

2. For callable bonds and MBS, the YTM measure also assumes holding

till maturity which is obviously inaccurate so the OAS uses binomial

tree which takes into account the contingency of the future coupons.

The OAS is a constant spread to the whole discount curve you use

( e.g. treasury) which would result in a PV equal to the market price.

[Wilmott (Sun Apr 27, 03 06:01 PM )]