To solve for the Option-Adjusted Spread (OAS), we need to find the specific constant spread that, when added to the discount rates along each path, results in an average present value (PV) equal to the current market price of the security.

Step 1: Calculate the Average PV for Each Spread

The problem states that there are six equally weighted paths. Therefore, the average PV for each spread is the simple arithmetic mean of the PVs across the six paths.

Step 2: Compare with the Market Price

The definition of OAS is the spread that equates the model value to the market price:

$\text{Average PV}_{\text{model}} = \text{Market Price}$

• Market Price: 70.17
• Average PV at 60 bps: 70.17

Since the average PV at a spread of 60 basis points matches the actual market price exactly, the OAS is 60 bps.

Key Concept: Understanding OAS

The Option-Adjusted Spread is the constant spread over the benchmark yield curve that makes the theoretical value of a risky security (like a CMO) equal to its market price, after accounting for embedded options (like prepayments).

• Relationship: As the spread increases, the discount rate increases, and the Present Value decreases.
• Monte Carlo context: In MBS/CMO valuation, we simulate many interest rate paths. The OAS is the "plug" figure that forces the average of those paths to equal the observed market reality.

Correct Answer: B: 60 basis points