What does Z-spread indicate?

The zero-volatility spread of a bond tells the investor the bond’s current value plus its cash flows at certain points on the Treasury curve where cash-flow is received. The Z-spread is also called the static spread. The spread is used by analysts and investors to discover discrepancies in a bond’s price.

Is OAS the same as spread duration?

These securities must therefore pay higher yields than noncallable debt, and their values are more fairly compared by OAS than by yield. OAS is usually measured in basis points (bp, or 0.01%). For a security whose cash flows are independent of future interest rates, OAS is essentially the same as Z-spread.

Does Z spread spread credit?

The Z-spread is also widely used in the credit default swap (CDS) market as a measure of credit spread that is relatively insensitive to the particulars of specific corporate or government bonds.

Is higher Z spread better?

Answer: Bond B is riskier and will sell at a lower price. Reason: Higher Z-spread implies it is riskier, and the higher discount rate makes the price lower than bond A.

Is OAS a credit spread?

The Option Adjusted spread is simply the Z- Spread excluding the premium to compensate for the option risk. Thus, the OAS is the spread above the treasury curve that compensates for credit and liquidity risk only. Z-spread is the all-in spread, meaning spread from the risk profile AND from the call risk.

How do you calculate the Z spread of a bond?

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

Why is I spread lower than G-spread?

I-spread is usually lower than the G-spread. This type of spread is also known as a zero-volatility spread. It is the spread that is added to each spot interest rate to cause the present value of the bond cash flows to equal bond’s price.

Is a high Z spread good?

What is ASW spread?

The ASW spread is a compensation for the default risk and corresponds to the difference between the floating part of an ASW and the LIBOR (or EURIBOR) rate. Corporate bonds are always quoted with their ASW spreads and their pricing is based on the spreads.

Which is cheaper the OAS or the Z-spread?

What you basically state by OAS = z – o is that OAS is less than the z-spread for callable bonds. Now if you compute the PV of the bond by discounting it by respective yields (Treasury yield + spread) you will find that the the bond discounted using the z-spread will be cheaper than the one discounted by OAS.

What is an Option Adjusted Spread ( OAS )?

Option adjusted spread (OAS) is flat spread which has to be added to the treasury curve to make the theoretical price of an interest rate derivative equal to market price by using dynamic pricing models that take into account embedded options.

Why is the OAS called the static spread?

The Z-spread is also known as the static spread because of the consistent feature. The OAS effectively adjusts the Z-spread to include the value of the embedded option. It is, therefore, a dynamic pricing model that is highly dependent on the model being used.

What’s the difference between OAS and zero volatility spread?

The option-adjusted spread adjusts the Z-spread to include the embedded option’s value. The zero-volatility spread (Z-spread) provides the difference in basis points along the entire Treasury yield curve. The analyst will use OAS and Z-spread to compare debt securities for value.