Z-spread

Definition

Z-spread in plain English

First, a quick setup: a bond is basically an IOU that pays you back on a schedule, and its fair price is found by adding up all those future payments after shrinking each one to reflect that money today is worth more than money later (that shrinking is "present value"). Different due-dates get shrunk by different market interest rates (the "spot curve"). The Z-spread is the single extra slice of interest you must add to every one of those rates so your calculated price finally matches the bond's actual market price. Think of a store where every item is marked up by the same fixed amount above the official sticker: the Z-spread is that constant markup, and a bigger one usually means investors see the bond as riskier and want more reward.

Learn these first

• Coupon rate
• Par value

Practice Z-spread

If the Z-spread is 180 bps, what is the 'option cost' and what does it represent?

Related Principles of Finance terms

• Accrued interest
• Allocation effect
• Basis
• Basis point
• Benchmark
• Bond-equivalent yield (BEY)
• Bootstrapping
• Callable bond
• Clean price
• Comparable company analysis (comps)