I understand nominal spread but why do we have the z spread. The main reason for having z spread is term duration but I dont understand

please can someone explain

thanks

I understand nominal spread but why do we have the z spread. The main reason for having z spread is term duration but I dont understand

please can someone explain

thanks

Nominal Spread is just the spread between the yield on the bond and a treasury yield. It is not a good measue to use for Valuation. The Z spread is the spread you must add TO EACH SPOT RATE of the bechmark (usually treasury) to make the discounted cash flows of the bond youâ€™re analyzing equal to its market price. The Z or zero volatility spread is a better measure than the YTM spread becasue it considers every point on the spot rate curve and if the spot rate curve is not flat(volatile) it provides a better measure of credit risk, liquidity risk and option cost (if applicable).

Thanks mgum

Mgurn: good job.

The nominal spread looks at one point on the (par) yield curve; the Z-spread looks at the entire (spot) yield curve from today to the maturity of the bond. The latter clearly holds more information.

Thanks alot

My pleasure.