medium · Asset-Backed Securities
An investor is comparing 'Nominal Spread' to 'Z-spread' for an auto ABS bond.
Why might the Z-spread be a more accurate measure of the bond's value relative to the Treasury curve?
- Z-spread is the only spread measure that fully incorporates the bond's prepayment optionality.
- Nominal spread is always higher, which makes the bond appear artificially cheap to buyers.
- Z-spread is used only for bonds that trade at a significant dollar discount.
- Z-spread accounts for the shape of the entire spot curve rather than a single point.
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