medium · Asset-Backed Securities
A practitioner is calculating the Z-spread of an ABS bond. How does this measure differ from a standard nominal spread when the yield curve is steeply upward-sloping?
- Z-spread is only applicable to floating-rate notes indexed to SOFR.
- The nominal spread is always higher than the Z-spread in an upward-sloping environment.
- The Z-spread discounts each individual cash flow at its specific spot rate plus a constant spread.
- The Z-spread includes a premium for the volatility of interest rates and prepayment options.
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