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**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.

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**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. |