Zero-volatility spread, Financial Management

The zero-volatility spread is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if a mortgage-backed or asset-backed security is held to maturity. Unlike normal spread, zero-volatility spread, is not a spread of one point on the Treasury yield curve. Zero-volatility spread also known as Z-spread and the static spread, is the spread that will make the price of a security equal to the present value of the cash flows from the mortgage-backed and asset-backed security when discounted at the Treasury spot rate plus the spread.  In other words, each cash flow is discounted at the appropriate Treasury spot rate plus the Z-spread.  A trial and error method is used in determining the

zero-volatility spread. The difference between the zero-volatility spread and the normal spread depends on the maturity or average life of a structured product, i.e., larger  the maturity  of the security greater is the difference, and shorter the maturity lesser the difference between both the measures. The shape of the curve also determines the magnitude of the difference between both the spreads. The steeper the curve the greater is the difference.

Posted Date: 9/10/2012 8:11:02 AM | Location : United States







Related Discussions:- Zero-volatility spread, Assignment Help, Ask Question on Zero-volatility spread, Get Answer, Expert's Help, Zero-volatility spread Discussions

Write discussion on Zero-volatility spread
Your posts are moderated
Related Questions
When an investor purchases non-callable or non-putable convertible bonds, he would be buying a non-callable/non-putable straight security and also buying a call o

Project Z has a cost of $ 50,000.00, its expected net cash flows are $11,000 per year for 8 years, and its cost of capital is 12 % (Hint: begin by constructing a time line). Ins

Q. Example to show the companys current gearing? The company's current gearing 2000/ 8500 × 100 = 23.53% The current gearing position is on the low side particularly wh

Explain cash flow and funds flow analysis with suitable example from an existing corporate entity for at least three years i.e. 2008, 2009.2010.

The exchange rate uncertainty may not essentially mean that firms face exchange risk exposure. Describe why this may be the case. Answer:  A firm can comprise a natural hedging p

Above the line deductions are certain kinds of deductions that are deducted from your income before the adjusted gross income is computed for tax purposes. Above the line deduct

Given the following information for Tandoori Grill Restaurant, calculate the total asset turnover and return on equity ratios: Net Profit Margin 8% Return on Assets 15% Debt R

Portfolio Management: Project Portfolio Management (PPM) is the centralized management of processes, technologies and methods used by project management offices (PMOs) and pro

Successful managers and investors understand the various financial markets and the investments these markets offer. A good understanding of potential gains and losses, as well as t

Examine the reasons for holding inventories by a firm & also discuss the techniques of inventory control