Z-spread

The constant amount added across the whole spot curve that makes a bond's discounted cash flows equal its price. Arithmetic, unlike the option-adjusted version.

Where you will meet it

Z-spread appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Contrast the Z-spread with the option-adjusted spread
  CFA Level I · Fixed Income

  “The Z-spread is the constant amount added to every point on the benchmark spot curve that makes the present value of a bond's cash flows equal its price.”

• Explain how option-adjusted spreads are computed and what they are used for
  CFA Level II · Fixed Income

  “For a callable bond, the Z-spread, which ignores the option, exceeds the OAS, and the difference is the option cost in spread terms; for a putable bond the OAS exceeds the Z-spread.”

• Weigh the strengths and weaknesses of the different spread measures used in credit portfolios, and show why the option-adjusted spread is the measure of choice
  CFA Level III · Portfolio Management Pathway

  “The Z-spread is the constant spread over each spot rate that prices the bond, so it reflects the whole curve, but for a bond with an embedded option it still includes the option's value.”

See also

Spot rate

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with Z · Glossary