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Basic Question 5 of 13
Which of the following statements is correct?
B. The Z-spread is the same as the nominal spread when the spot rate curve is flat.
C. The Z-spread is lower than the nominal spread when the spot rate curve is upward sloping.
A. The Z-spread is greater than the nominal spread when the spot rate curve is downward sloping.
B. The Z-spread is the same as the nominal spread when the spot rate curve is flat.
C. The Z-spread is lower than the nominal spread when the spot rate curve is upward sloping.
User Contributed Comments 11
| User | Comment |
|---|---|
| synner | in other words, spot rate curve is downward sloping, Z spread < nominal spread, and when spot rate curve is upward sloping, Z spread>nominal |
| danlan2 | Remember this: upward, nominal spread |
| faya | how i remember: z-spread exaggerates the spot rate curve. If spot curves upward, z-spread is higher. If spot curves downwards, z-spread is lower. |
| jwebbs | yea faya's way is the easiest to remember it |
| Fingon | Thanks for putting it in layman's terms, faya. |
| fanfanli | Alternatively, remember the Z-Spread tracks the yield curve and will reflect its movements. Whereas the Nominal assumes one constant rate throughout. |
| tabulator | fanfanli nailed it... BEST metaphor! |
| antihead | who is supposed to remember all that? |
| johntan1979 | Sounds silly but I remember it through the alphabets... from N down to Z, N comes first, so greater than Z. |
| MohitSeth1976 | Alphabatical order A-z downward moving so N is bigger then z. Z-A upward moving so z is bigger then N.(easy to remember. |
| ashish100 | I have decided Faya gets first prize Everyone else gets last |
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Learning Outcome Statements
explain the calculation and use of option-adjusted spreads;
explain how interest rate volatility affects option-adjusted spreads;
CFA® 2025 Level II Curriculum, Volume 4, Module 28.