CFA Level I · CFA Level I Exam · Credit Risk
Compared with the nominal spread over a government benchmark, the zero-volatility spread (Z-spread) of a bond is most likely:
The Z-spread is a constant spread added to each spot rate on the benchmark curve so that the present value of the cash flows equals the bond's market price. This differs from a nominal spread, which compares a single yield with one benchmark yield.
- Aa spread that removes embedded option value
- Ba spread applied to each point on the spot curveCorrect
- Ca spread over a single interpolated yield
Explanation
The Z-spread is the constant spread added to every spot rate on the benchmark curve so that the discounted cash flows equal the bond price. The nominal spread uses a single yield point. Removing option value is the OAS, not the Z-spread.
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