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Basic Question 5 of 13

Which of the following statements is correct?

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.
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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 spreadZ-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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Craig Baugh

Craig Baugh

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.