How do you find the Z-spread of a bond?

The Z-spread of a bond is the number of basis points (bp, or 0.01\%) that one needs to add to the Treasury yield curve (or technically to Treasury forward rates), so that the NPV of the bond cash flows (using the adjusted yield curve) equals the market price of the bond (including accrued interest).

Why is Z-spread negative?

It is possible to have a negative Z-spread, which would imply a holder is willing to take fixed spread below the current risk free spot yield curve. This could be interpreted as being that the bond is perceived to be safer than “risk free” treasuries.

What is the difference between Z-spread and OAS?

Thus, the OAS is the spread above the treasury curve that compensates for credit and liquidity risk only. Z-spread is the all-in spread, meaning spread from the risk profile AND from the call risk. The OAS factors out (subtracts) the additional spread associated with the embedded option, so the OAS will be lower.

What is OAS fixed income?

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. Typically, an analyst uses Treasury yields for the risk-free rate.

What is spread to worst?

Spread-to-worst (STW) measures the dispersion of returns between the best and worst performing security in a given market, usually bond markets, or between returns from different markets.

What is the G-spread?

The G-spread is the yield spread in basis points over an interpolated government bond. The spread is higher for bearing higher credit, liquidity, and other risks relative to the government bond. The I-spread is the yield spread of a specific bond over the standard swap rate in that currency of the same tenor.

What is Z-spread vs G-spread?

Z-spread stands for zero-volatility spread. While G-spread and I-spread just measure the difference between the static yield to maturity of the bond and the Treasury yields or benchmark rate, Z-spread determines the difference in yields with reference to whole term structure of interest rates.

Can OAS be higher than Z spread?

When a call option is added to a bond, since it is not favorable to the bond buyer, they would require more spread (which is the OAS) for this instrument in order to get more discount on the bond price. So to me, Z spread should be less than the OAS.