The schweser study guides are not very descriptive about Z spread and OAS. I am still confused after reading the topic two times. I will try to grab it from the CFAI Text books when I receive them. Were there any tough questions in the June exam from this area?

Not that I recall… Z spread is the percentage amount of yield that one should add to each cash flow’s spot rate. i.e. What fixed percentage yield increase should you add to each treasury spot rates in order to match the riskier bond’s price. It is more accurate than a nominal spread because it takes into account different spot rates at different points in the bond’s life. The OAS is simply the Z-spread adjusted as if there was no option embedded at all. So, you can now compare the yield of a option free bond with a bond that has embedded options. The OAS of a option bond is comparable with the Z-spread of an option-free bond.

Thanks for the simplified definition. It would have been easier to remember if Schweser had provided some graphs.

anyone knows what’s the difference of Treasury yield curve and Treasury spot rate curve?

Yield curve assumes that the discount rate to calculate the PV of all future cash flows is One single value known as YTM. Spot rate curve assumes that for each future cash flow there will be a different discount rate known as Spot rate.

OAS is model dependent, but it seems to me that all three yield measures must take into account the treasury spot rate curve in it’s calculation methodology…

nominal spread uses yield curve, rather than the treasury spot rate curve. so nominal spread will be equal to z spread only when the treasury spot rate curve is flat