A measure of the creditworthiness of a bond. It sets the bond’s Z-spread curve against the CDS contract (CDS spread). The Z-spread and CDS spreads can roughly converge for low-yield bonds priced close to par. But for high-yield bonds, or bonds priced away from par, the two measures will diverge.
In other words, this spread measures the flat credit spread premium implied by the bond price. It can be calculated by implying the hypothetical CDS spread that will be used to recover the market price of the bond in question.
It is also known as a PECS.
