#bonds #finance #yield-to-maturity #z-spread
If you calculate the present value of all future cash flows for a bond using prevailing spot rates, you may discover that the price you calculate is greater than the price observed in the market. This difference arises because the market price incorporates additional factors such as
liquidity and
credit risk. The Z-spread quantifies the impact of these additional factors. It is the spread you need to add to the curve you are discounting with in order to generate a price that matches the market price.
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Z-spread - Wikipedia, the free encyclopediausted yield curve) equals the market price of the bond (after accounting for accrued interest). The spread is calculated iteratively and improves the accuracy of the value calculation as it uses the entire yield curve to value the cash flows.
<span>If you calculate the present value of all future cash flows for a bond using prevailing spot rates, you may discover that the price you calculate is greater than the price observed in the market. This difference arises because the market price incorporates additional factors such as liquidity and credit risk. The Z-spread quantifies the impact of these additional factors. It is the spread you need to add to the curve you are discounting with in order to generate a price that matches the market price.
Conventionally, the zero rates are determined from the Treasury curve, with semi-annual compounding.
The Problem with YTM spreads[edit]
Coupon Paying bonds are essentially portfolios of Summary
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