medium · Asset-Backed Securities tranching
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 applies only to floating-rate notes indexed to SOFR, never to fixed bonds.
- The nominal spread is always mathematically higher than the Z-spread on an upward curve.
- The Z-spread discounts each individual cash flow at its specific spot rate plus a constant spread.
- The Z-spread includes an added premium compensating for rate volatility and embedded prepayment optionality.
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