hard · Asset-Backed Securities collateral
An analyst calculates the 'Z-spread' and the 'Nominal Spread' for a prime auto ABS bond.
In a positively sloped yield curve environment, why would the Z-spread typically be lower than the Nominal Spread for this front-loaded security?
- Z-spread accounts for the cost of the borrower's prepayment option.
- Nominal spread includes a premium for the credit risk of the subordinate tranches.
- Z-spread discounts earlier cash flows at the lower short-end rates of the curve.
- Z-spread is only applicable to bonds trading at a significant discount to par.
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