CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the different ways to measure a spread over some benchmark yield curve?
A. Assigning nominal spreads over some benchmark ignores the term structure of interest rates.
B. A large nominal spread is very common among putable bonds.
C. A zero-volatility spread measures what an investor would earn above the comparable Treasury security if interest rates do not change.
Explanation: B is incorrect because putable bonds are more expensive than straight bonds, and therefore they will generally have much lower nominal spreads.

C is not exactly correct since the zero-volatility spread measures what an investor would earn above the Treasury spot curve if the security was held to maturity. Thus, this theoretical spread is not just above one comparable Treasury security, but rather the entire spot curve. What's more, this spread is theoretically constant across the entire term.

User Contributed Comments 1

User Comment
challenge11 Even though it's based on spot, if rates don't change, then the z spread should measure what is earned above a comparable security.
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