Option-adjusted spread

Okay kiddo, imagine you borrow some money from the bank, and you have to pay back that money with some interest. The interest rate could be different based on different circumstances. Similarly, a bond issuer borrows money from investors by issuing bonds, and the investors receive interest payments as a reward.

Now imagine you have a friend who offers you a deal - you give him some money now, and he will pay you back with some interest later. But this time, he gives you the option to change the terms of the deal, like how much interest you will receive, in the future based on some conditions.

These conditions could be like how much the inflation rate changes, or how the market interest rates change, or other economic factors. This option that your friend is giving you is called an "option-adjusted spread" (OAS). It means the spread, or the difference between the interest rate you receive and the market interest rate, is adjusted based on certain conditions that are uncertain at the time of the deal.

So in summary, an option-adjusted spread is like having a flexible interest rate based on certain conditions that might change in the future. It's like a friend giving you an option to change the interest rate based on future events.