hard · CFA Level I Fixed Income
Caldera Glass is considering issuing a 10-year bond. The currently trading 8-year Caldera bond has a G-spread of 120 bps, while the 12-year Caldera bond has a G-spread of 160 bps. The 10-year government spot rate is 3.50%.
If an analyst calculates the Z-spread for the 8-year bond and finds it is 135 bps (higher than the G-spread), the most likely reason is that:
- The bond has an embedded call option.
- The 8-year government bond is currently 'on special' in the repo market.
- The government yield curve is upward-sloping.
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