CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds
Compared with the G-spread, the Z-spread of a fixed-rate bond is most likely to be a more accurate measure of the bond's credit and liquidity compensation because the Z-spread:
The Z-spread is a constant spread added to every spot rate on the benchmark curve so the present value of the cash flows equals the bond's price. Because it uses the entire spot curve rather than one maturity, it captures the term structure better than the G-spread.
- Ais added to the yield of one benchmark maturity
- Buses the bond's coupon rate as the discount rate
- Cis a constant spread added to every spot rate on the benchmark curveCorrect
Explanation
The Z-spread is the constant spread added to each spot rate so that discounted cash flows equal the bond price. It therefore reflects the whole term structure, which matters when the curve is steep. A single-maturity benchmark describes the G-spread, and the coupon rate is not a discount rate here.
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