Taken from Jawwad's site that provides a simple explanation:
The option adjusted spread (OAS) is a constant spread that when added to the interest rates used to discount the cash flows produces a theoretical value of the bond that is equal to the market price of the bond. It is an alternative way of expressing the difference that lies between the theoretical value and the observed market price, i.e. in the form of a yield spread rather than a difference in prices.
In order to demonstrate how the OAS is determined for the Mortgage Pass Through Security in the model the following steps given below were taken:
For illustrations purposes, the observed market price is assumed to be the value of the MBS calculated using a constant discount rate equal to the 30-year fixed mortgage rate observed in the market assuming prepayments occur at 100% of PSA. We can use an OAS Monte Carlo simulation approach to generate interest rate paths. These interest rates are assumed to be short term rates to which the OAS is added to determine the rates at which MBS cash flows will be discounted. The simulated interest rates are also used to determine the prepayment rates for the MBS. In order to determine the relationship between the prepayment rates and the interest rates we can develop a prepayment rate function which is a function of interest rates using linear regression and based on the historical relationship between these two rates the future Mortgage Pass Through cash flows for each interest rate path are calculated. The cash flows are discounted by interest rates plus a “guess” OAS to determine 100 theoretical prices for one unit of Mortgage Pass Through Security.
A simple average of the theoretical price over all paths is calculated and the model solves for an OAS that equates this average simulated price to the observed market price.
It's one way to perform OAS simulations you mentioned. Basically, Option Adjusted Spread (OAS) looks at the cash flows are generated from multiple simulated coupon rate paths. Prepayment rates vary along each rate path with varying prepayment factors. The calculated multiple cash flow streams are discounted to produce present values for each path. The present values are then averaged over all the path. A spread is added to the discount curve to equate present value with market value prices. This spread is known as OAS, which represents the average spread over the LIBOR(discount) curve that will be earned on the this security over the remaining life that was simulated in the paths.
TROR is probably simply the total rate of return. I don't know what else it can be.
