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
The idea
The benchmark spread is a bond's yield minus that of a government bond of similar maturity; it is simple but maturities rarely match. The G-spread interpolates the government curve to the bond's exact maturity, and the I-spread uses swap rates instead. 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. The asset swap spread and the CDS basis compare the bond with the floating-rate and CDS markets. The option-adjusted spread strips out the option with a rate model, making callable and option-free bonds comparable; its weakness is dependence on the volatility assumption.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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