Z-spread (zero-volatility spread)
Asset-Backed Securities glossary · Collateral & Cash Flow Modeling
Definition
The constant spread over the Treasury spot curve that equates the present value of a bond's deterministic cash flows to its price.
Z-spread (zero-volatility spread) in plain English
The Z-spread measures how much EXTRA yield a bond pays you above ultra-safe government (Treasury) bonds, as one flat number stacked on top of the whole interest-rate curve. Here's the idea: every future payment from the bond should be discounted (shrunk to today's value) using the matching risk-free rate for that date, PLUS one constant nudge — the Z-spread — and you find the exact nudge that makes those discounted payments add up to the bond's actual price. A bigger Z-spread means investors demand more reward, usually because the bond is riskier or less liquid than Treasuries. It's a clean way to compare 'how much are you being paid to take this risk?' across very different bonds.
Also called: zero-volatility spread
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