Zero-volatility spread, Financial Management

Assignment Help:

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.


Related Discussions:- Zero-volatility spread

Capital budgeting, identify and explain the key stages in the capital inves...

identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this processs..

Types of finance functions/ decisions, TYPES OF FINANCE FUNCTIONS/ DECISION...

TYPES OF FINANCE FUNCTIONS/ DECISIONS The most main decisions in finance relate to procuring funds, investing them in profitable projects or assets, operate for the year and a

Case let, This case has been framed in order to test the skills in evaluati...

This case has been framed in order to test the skills in evaluating a credit request and reaching a correct decision. Perluence International is large manufacturer

What is the expected return of cinderella''s portfolio, Question: Cinde...

Question: Cinderella invests the following sums of money in common stocks having the expected returns as detailed below: (a) What is the expected return of Cinderella's por

Difference between a parallel loan and back to back loan, Describe the diff...

Describe the difference between a parallel loan and a back-to-back loan. Answer:  A parallel loan contains four parties.  One MNC (multinational company) borrows and re-lends to

Predicting cross-sectional returns, Predicting Cross-Sectional Returns ...

Predicting Cross-Sectional Returns If the market is assumed to be efficient, all securities should lie along the security market line that relates the expected rate of return t

What do you mean by working capital, Q. What do you mean by Working Capital...

Q. What do you mean by Working Capital? Meaning of Working Capital:- Working capital management is a significant aspect of financial management. In business money is necessar

Qualitative analysis, Does your company have a cutting-edge product idea th...

Does your company have a cutting-edge product idea that will blaze new trails in its industry? Is it properly retiring out-of-date products and keeping current with new consumer de

Trade credit is free credit agree or disagree, Trade credit is free credit....

Trade credit is free credit.  Do you agree or disagree with this statement?  Explain. Trade credit isn't free.  It has a value.  Who bears that cost depends on the conditions o

Illustrate working capital cycle in a manufacturing business, Working capit...

Working capital cycle in a manufacturing business Average time raw materials are in stock (raw materials/purchases x 365 days)   Plus   Time

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd