Z-Spread¶
One-line definition¶
The constant spread added to every point on the zero (spot) curve that reprices a bond to its observed market price.
Formula¶
Solve for s in:
Price = sum_t CF_t / (1 + (z(t) + s)/frequency)^(t*frequency)
where z(t) is the interpolated zero rate at time t. No closed form —
z_spread in src/pm/fixed_income/credit.py root-finds it.
Why PMs care¶
Z-spread is a cleaner credit-risk measure than a nominal yield spread (YTM minus a benchmark yield) because it's measured against the whole curve shape, not a single benchmark point — it isolates the compensation for credit/liquidity risk from curve-shape effects.
Limitations¶
Assumes the bond has no embedded optionality. For callable/putable bonds,
Z-spread overstates true credit compensation — see oas.md.