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 |