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Zero-Volatility Spread (Z-spread)

Zero-Volatility Spread (Z-spread)

What is the 'Zero-Volatility Spread - Z-spread'

The Zero-volatility spread (Z-spread) is the constant spread that makes the price of a security equal to the present value of its cash flows when added to the yield at each point on the spot rate Treasury curve where a cash flow is received. In other words, each cash flow is discounted at the appropriate Treasury spot rate plus the Z-spread. The Z-spread is also known as a static spread.

Explaining 'Zero-Volatility Spread - Z-spread'

The Z-spread helps analysts discover if there is a discrepancy in a bond's price. Because the Z-spread measures the spread that an investor will receive over the entirety of the Treasury yield curve, it gives analysts a more realistic valuation of a security instead of a single-point metric, such as a bond's maturity date.

Z-Spread Calculation

A Z-spread calculation is different than a nominal spread calculation. A nominal spread calculation uses one point on the Treasury yield curve (not the spot-rate Treasury yield curve) to determine the spread at a single point that will equal the present value of the security's cash flows to its price.


Zero Volatility Spread (z Spread) FAQ

What does Z spread mean?

It means Zero-volatility spread.

What does a high Z spread mean?

It means there's a high risk.

How do you calculate the Z spread of a bond?

The number of basis points (bp, or 0.01%) one needs to add to the Treasury yield curve (or technically to Treasury forward rates) for the NPV of the bond cash flows (using the adjusted yield curve) to equal the market price of the bond (including accrued interest) is the Z-spread of a bond.

What is G spread and Z spread?

G spread: also known as the nominal spread, is the spread over or under a government bond rate. Z spread (zero volatility spread): the constant yield spread over the benchmark spot curve such that the current value of the cash flow matches the bond's price. OAS (option-adjusted spread): Z spread - option value.

What is Z spread CFA?

The entire benchmark spot curve determines a Z-spread (zero-volatility spread). It is the constant spread added to each spot rate such that the current value of the cash flow matches the bond's price.

How is Z spread calculated?

The number of basis points (bp, or 0.01%) one needs to add to the Treasury yield curve (or technically to Treasury forward rates) for the NPV of the bond cash flows (using the adjusted yield curve) to equal the market price of the bond (including accrued interest) is the Z-spread of a bond.

How do you calculate yield spread?

The difference between the quoted rate of return on different instruments of debt, which often have varying maturities, credit ratings, and risk is a yield spread. It is easy to calculate the spread since you subtract the yield of one from that of the other, in terms of percentage or basis points. Oct 2, 2020

Why is the swap spread negative?

The most notable explanation behind negative swap spreads has been regulation. The regulatory prerequisite for central clearing of most interest rate swaps (except for swaps with commercial end users) has eliminated counterparty risk from such swap contracts.

Further Reading

Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreadsDoes sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads
www.sciencedirect.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainabilityCorporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability
www.sciencedirect.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

A Gaussian Rates-Credit Pricing FrameworkA Gaussian Rates-Credit Pricing Framework
link.springer.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

The Contingent convertibles pricing models: CoCos credit spread analysisThe Contingent convertibles pricing models: CoCos credit spread analysis
link.springer.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

Vanilla Bonds and Asset SwapsVanilla Bonds and Asset Swaps
link.springer.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

Monetary Policy, Spread Compression, and the Housing MarketMonetary Policy, Spread Compression, and the Housing Market
link.springer.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

Risky Bonds, Floaters and SwapsRisky Bonds, Floaters and Swaps
link.springer.com [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …

The Effects of Housing Price Volatility on Mortgage RatesThe Effects of Housing Price Volatility on Mortgage Rates
aresjournals.org [PDF]
… Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero-volatility spreads (z-spreads … and principal repayments, are discounted with the same rate, as the spread is measured … This means that in contrast to nominal yield spreads, valuing a bond in a …


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