The spread that would be realized over the whole risk-free spot rate curve if a given risky security such as an asset-backed security (ABS) or a mortgage-backed security (MBS) is held to maturity date. This spread that when added to the present value of the risky security’s cash flows, discounted at the risk-free spot rate (like Treasury spot rate), will equal the price of the security in question. Threrefore, this spread is calculated using trial and error.
This spread asumes that interest rate volatility is zero.
It is also known as a zero spread or a zero volatility spread or a Z-spread.
