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Z-Spread


It stands for zero-volatility spread. The basis points which are added to the yield at each point on the spot treasury rate curve marking the receipt of a cash flow. As is normally the case, the spot treasury rate virtually constitutes no volatility. The yield plus this spread will make the price of a debt instrument equal to the present value of the cash flows generated by that instrument. Those cash flows will be discounted at the appropriate spread-adjusted yield.

An investor holding a bond to maturity would capture this spread over the entire yield curve (zero curve). The zero-volatility spread differs, in that sense, from the nominal spread as the nominal spread is categorically calculated on one point on the treasury yield curve. To the contrary, the zero-volatility spread uses a number of spot rates on the treasury yield curve. As such, each cash flow is discounted using its maturity and a respective spot rate for that maturity. This implies that a different zero-coupon rate is applied to each cash flow.

The zero-volatility spread is typically contrasted with the asset-swap spread to find out any discrepancies in the price of a fixed-income security. In general, those two spreads tend to converge in the cases of short-term debts and high credit-rating debts.

It is also known as a static spread.



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