nominal/z/OAS spreads

the explanation in the CFAI text is less than straighrforward. can someone summarize the main differences between the three spreads and comment on how this may be tested?

Nominal Spread: Target security YTM - Benchmark YTM Z-Spread: Target Rate - Spot Rate OAS: Z-Spread + - Embedded Option Cost (in %) -For callable bonds: Embedded Option Cost > 0 -For puttable bonds: Embedded Option Cost < 0 OAS reflects spread for credit risk & liquidity risk.

You gotta know this stuff - read more until you have it. This is especially important as it is a basis for lots of LII stuff.

i am having trouble with defining z-spread… what does it mean by “target rate - spot rate”? and what is the (if there are any) relationship between nominal and Z spreads? i remember schweser said something about z-spread being the difference between the rate of riskier bond spot and rate of treasury bond, or something to that extent, but i didn’t really get it.

have a look into your books: the nominal spread is defined as the spread in yields. the z-spread is defined as being the spread on the *whole yield curve*.

I thought the z/ytm difference was more like: ytm assumes a flat yield curve (so all flows are discounted at the same rate); z spread approach relaxes that assumption, allowing a term structure of rates. (However, only the benchmark rate can exhibit a TS; the spread itself is the same everywhere.)