- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 7. Yield and Yield Spread Measures for Fixed-Rate Bonds
- Subject 3. Yield Spread Measures for Fixed-Rate Bonds and Matrix Pricing
CFA Practice Question
Which of the following statements is correct?
B. The Z spread is the same as the G spread when the spot rate curve is flat.
C. The Z spread is lower than the G spread when the spot rate curve is upward-sloping.
A. The Z spread is greater than the G spread when the spot rate curve is downward-sloping.
B. The Z spread is the same as the G spread when the spot rate curve is flat.
C. The Z spread is lower than the G spread when the spot rate curve is upward-sloping.
Correct Answer: B
If the spot rate curve is downward-sloping, the G spread will be greater than the Z spread. If the spot rate curve is upward-sloping, the G spread will be less than the Z spread. If the spot rate curve is flat, the G spread will be equal to the Z spread.
User Contributed Comments 9
| 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 spread<Z-spread; downward, nominal spread>Z-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! |
| 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. |