7. The model employed in this discussion, like many other OAS models, used Monte Carlo simulation and an econometric prepayment model. A minimum of 200 paths was generated in the analysis. The total spread computed is a total spread to the entire Treasury yield-curve (precisely, the forward rates implied by current Treasury yields), as opposed to a single benchmark. It roughly approximates the spread to a particular Treasury quoted in the market, but differs more or less depending on the slope of the yield-curve. The total spread is the spread over Treasuries the security would earn given its current market price if there were zero volatility. The option-adjusted spread (OAS) is the average spread earned across a large sample of interest rate scenarios given the market price. The option cost is measured as the difference between total and option-adjusted spread, and captures the reduction in total spread caused by interest rate volatility.
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