CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

If the rates for periods one through six are all 4.25%, what is the relationship between the G spread and the Z spread for the 7% five-year corporate bond and the 6.5% five-year Treasury bond?
A. The spreads are equal when the yield curve is flat.
B. The Z spread is always greater than the G spread.
C. The lower the market rates, the greater the spreads.

User Contributed Comments 8

User Comment
myanmar explanation please?
ThePessimist Nominal spread assumes a single discount rate for all cash flows, while Z-spread uses benchmark spot rates. If the spot rates are all the same, then that same rate will also be the YTM on the T-bond used to calculate the nominal spread.
dblueroom z-spread is the spread added to each benchmark spot rate used to discount CF to arrive at market price of bond.
tim2 what's wrong with C?
uviolet C is not appropriate for this question because you have to answer the question from the perspective of the scenario
tim2 I made it nominal spread = 7-6.5 = 0.5%
Z spread for corp bond = 7- 4.35% = 2.65%

so the Z spread is greater, so answer B rather than A?
nizarn there is no difference between the nominal spread and the Z-spread when the spot yiel curve is flat.
bruno5104 Spot rate curve flat: Z-spread = Nominal spread
Spot rate curve downward: Z-spread < Nominal spread
Spot rate curve upward: Z-spread > Nominal spread
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