Definition of Zero-Volatility Spread
What is a Zero-Volatility Spread
A zero-volatility spread, also known as a Z-spread, is a type of bond spread or yield spread that is used to measure the difference between the yield of a bond and the yield of a risk-free bond with the same maturity. The Z-spread takes into account the credit risk, liquidity risk and other factors that affect the yield of the bond.
The Z-spread is called "zero-volatility" because it assumes that the yield of the bond will remain constant regardless of changes in interest rates or other market conditions. In other words, the Z-spread is the measure of the spread that would need to be added to the risk-free rate to make the present value of the bond's cash flows equal to its market price.
How Does a Z-Spread Work
The Z-spread is used by investors and analysts to compare the yields of different bonds and to assess the relative value of a particular bond. A higher Z-spread indicates that the bond has a higher yield and therefore offers a higher return to investors. Conversely, a lower Z-spread indicates that the bond has a lower yield and may not be as attractive to investors.
The Z-spread is often used in fixed-income securities, such as corporate bonds, municipal bonds and mortgage-backed securities (MBS), where credit risk and other factors can impact the yield of the bond. By calculating the Z-spread, investors and analysts can gain a better understanding of the risk and return characteristics of a particular bond and make more informed investment decisions.
GlobEx Markets Financial Dictionary of Terms, Phrases and Concepts
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Related Investment Terms
Mortgage-Backed Security (MBS)
Yield Curve
Yield to Maturity (YTM)
