An online question of Kaplan Schweser (Lv. 1, FI) reads:
A disadvantage of G-spreads and I-spreads is that they are theoretically correct only if the spot yield curve is:
(b) downward sloping
(c ) upward sloping
Answer: (a) flat.
Explanation: G-spreads and I-spreads are only correct when the spot yield curve is flat (yields are about the same across maturities).
Why is this the case? The spot yield curve is almost never flat, so I assume that this theoretical consideration does not prevent the G-spread and the I-spread from being used in the real world. What’s the problem with these two spreads when the yield curve is sloping upward or downward?