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

Determine the return on invested capital, 1.      Consider the following tw...

1.      Consider the following two investment alternatives   Net cash flow   End of year Machine A Machine

Basic of finance, discuss three approaches to short-term financing

discuss three approaches to short-term financing

Define the term- earnings per share, Define the term- Earnings per share (E...

Define the term- Earnings per share (EPS) EPS = Profit available to ordinary shareholders (PAT) / Weighted average number of shares in issue(p per share) This ratio illustra

Coefficient of variation evaluating risk of capital budget, Why is the coef...

Why is the coefficient of variation a better risk calculates to use than the standard deviation while evaluating the risk of capital budgeting projects? The coefficient of variat

Deefine market price of a bond be influenced, If all other things held cons...

If all other things held constant, how would the market price of a bond be influenced if coupon interest payments were made semiannually in place of annually? Several bonds iss

Mortgage pass-through securities, The basic form of a mortgage back...

The basic form of a mortgage backed security is that of a mortgage pass-through security. Among the mortgage-related securities, the mortgage pass-through s

Operating cycle, discuss the applicability of operating cycle in poultry in...

discuss the applicability of operating cycle in poultry industry

Alternative dividend policies, The managing directors of three profitable l...

The managing directors of three profitable listed companies discussed their companies'' dividend policies at a business lunch. Company A; has deliberately paid no dividends for th

Advantages and disadvantages of aggressive working capital, What are the ad...

What are the advantages and disadvantages of the aggressive working capital financing approach? An belligerent working capital financing approach typically results in a lower c

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