Zero-Volatility Spread (Z-Spread) - Definition

The Z-spread, ZSPRD or Yield Curve spread on a simple mortgage-backed security (MBS) is the flat spread over the treasury yield curve required in discounting a pre-determined coupon schedule to arrive at its present market price.

Z-spreads can also be used as an Economic Indicator, where a negative z-spread often indicates a Recession is on its way. Calculating the z-spread requires trial and error to find the correct spread, using Basis points so that the present value of cash flows and the bond's price are the same.

As the Z-Spread is not dependent upon only one point on the Yield Curve and takes account of all of the relevant term-structure, the distortions of Yield-to-Maturity spreads outlined above are eliminated. It is then a measure of Credit Spread without the distortions of YTM. It is widely used in the CDS and other markets by non bond traders who want a fair reading of Credit Spread undistorted by the complexities of individual bonds.

The Z Spread is widely used as the "cash" benchmark for the calculation of the CDS Basis. The CDS basis is commonly the CDS Fee minus the Z Spread for a bond of the same maturity. For the example, 10 Year RBS CDS is currently 199.7 bps, the Z Spread for their 10 year Global bond is 286.8, giving a negative basis of -87.1bps.

Terms near "Zero-Volatility Spread (Z-Spread)"

Zeta Model
Zig Zag Indicator
Zombie Bank
Zombie Debt
Zone Of Possible Agreement
Zone Of Support
Zoning Ordinance
Zvi Griliches
Ready to Trade!
First you'll need an online broker. See how much you can save by visiting Forexbite Broker Center.

Zero-Volatility Spread (Z-Spread) - Related articles & news

Top 5 factors that affect exchange rates ...

There are many factors that affect exchange rates of currencies. However some are more important in currency trading than others. These are; Interest and Inflation rates, Trade balance, Currency market speculation, Foreign investment and Central bank market intervention. Learn how to use these factors in your forex tra ...

Forex Navigation