Lesson 6 of 6 · All lessons in this module
- Periodicity and converting annual yieldsVideo lesson
- Current yield and other yield conventions
- Callable bonds: yield-to-call, yield-to-worst and option-adjusted yieldVideo lesson
- Benchmark rates, yield spreads and the G-spread
- I-spread, Z-spread and option-adjusted spreadVideo lesson
- Integrated cases: G-spreads from prices, Z-spreads from curves
Lesson 6 of 6 · 16 min
Integrated cases: G-spreads from prices, Z-spreads from curves
Spread cases hide their difficulty in the first step: a G-spread needs two yields that you must first extract from two prices, and a Z-spread needs every cash flow discounted at its own spot rate plus one constant.
In short
- G-spread from prices: solve the corporate YTM and the government YTM from their prices on the same compounding basis, then subtract. Double the periodic rates for semiannual bonds.
- Price from a Z-spread: add the same spread to every spot rate, discount each cash flow at its own adjusted rate and sum. There is no shortcut with one flat rate.
- Testing answer options: reprice the bond at each candidate Z. A higher Z gives a lower price, so if your repriced value is above the market price, the true Z is higher.
- YTM minus a spot rate is not a Z-spread. It can land close, which is exactly why it is a tempting wrong option.
- Read the exhibit for what each spread actually needs: prices and coupons for a G-spread; a spot curve for a Z-spread.
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