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**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.

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**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 |