medium · Asset-Backed Securities collateral

If the nominal spread is calculated at 150 basis points over the 3-year Treasury, how would the Zero-Volatility Spread (Z-spread) typically compare, and why?

1. The Z-spread would be higher than 150 bp because it captures a 'convexity cost' tied to the amortizing principal schedule, which the nominal spread calculation entirely ignores.
2. The Z-spread would be lower than 150 bp because the bond's early cash flows are discounted at 1 and 2-year spot rates that are lower than the 3-year benchmark used for nominal spread.
3. The Z-spread would be considered largely irrelevant here, since for an amortizing bond, only the Option-Adjusted Spread (OAS) truly captures the timing of the underlying cash flows.
4. The Z-spread would be exactly 150 bp because both spread measures assume a single weighted-average life for discounting all of the bond's individual principal and interest cash flow payments.

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