Z Spread is a measure of: One point on the spot curve one point on the treasury yield curve Any ideas?

a

thanks, that what I thought as well

actually wait The zero-volatility spread is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity. So therefore the answer is B right?

what’s the definitive answer here? The other two answers in the Q were: all points on the spot curve & all points on the treasury yield curve

I believe the the reason you use the Z spread is to discount your bond’s CF’s using all the appropriate spot rates (i.e., all teh spot rates that correspond to the time of teh CF’s), so in that sense you are looking at many spot rates.

Bloomberg says it is the amount required to adjust the swap spot curve to make the bond’s NPV = its market price in the asset swap. There are about 6 definitions, none of them mention treasuries.

Well when I took classes last time the lecturer just drilled it into me that Z spread refers to SPOT rates, but in this case i’m not sure what spot rates. I HATE the way we don’t get answers to the mock… If no-one knows the answer I guess we’ll just have to hope this Q doesn’t come up!

its the same amount you add to each treasury spot rate to get the discounted cash flows equal to the price of your bond.

it can be any spot rate i think. treasury is the curve most spreads are cacluated from though

I believe that the Z-spread is using the various spot rates, not just one. If you were just to use 1 spot rate, you would just figure out the nominal spread. You are going to make an adjustment for the yield curve, which is a much more accurate way of measuring the premium of a bond to risk free securities (Treasuries). This way, each cash flow is adjusted for the timing that you will recieve it. Thus, I believe that the answer should be D, all points on the Treasury yield curve.

I have to agree with rlange.

mambovipi Wrote: ------------------------------------------------------- > what’s the definitive answer here? The other two > answers in the Q were: > > all points on the spot curve & all points on the > treasury yield curve I like a) much better than the other a).

amberpower Wrote: ------------------------------------------------------- > Bloomberg says it is the amount required to adjust > the swap spot curve to make the bond’s NPV = its > market price in the asset swap. > That’s the asset swap spread not the Z-spread. > There are about 6 definitions, none of them > mention treasuries. Probably you should read those again.

The Z-spread is the spread that needs to be added to the spot curve so that the discounted value of the cash flows equals the bond price. The question is where do you get the spot curve. You can get it from lots of different places and the US Treasury has a whole methodology and publishes the curve daily. Bloomberg gets it from the swap curve which is somewhat different since it would be a AA spot curve not a gov’t spot curve.

Here is the explanation “Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi 2008 Modular Level I, Vol. 5, pp. 446-449 Study Session 16-68-f differentiate between the nominal spread, the zero-volatility spread, and the option-adjusted spread The zero-volatility spread is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity.

There’s a whole bunch of other “if’s” that need to go with that.