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

What is the matching principle of working capital financing, What is the ma...

What is the matching principle of working capital financing?  What are the benefits of following this principle? The matching principle is while short-term financing is used fo

Computation of the value of the firm, Q. Computation of the Value of the fi...

Q. Computation of the Value of the firm? The argument given by MM in favour of their hypothesis is that whatever increase in the value of the firm results from the payment of d

Need for assessing the risks , Define risk. Examine the need for assessing ...

Define risk. Examine the need for assessing the risks in a project

COST OF CAPITAL, cost of capital, Financial Management The Nu-Nu Brothers I...

cost of capital, Financial Management The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equ

Speculating on future exchange rate movements, There is some discussion on ...

There is some discussion on whether Multinational Corporations (MNC's) enhance risk when borrowing foreign currencies. Those in favor of borrowing state that lower costs of financi

Explain the structure of main financial statement, Citilink has just comple...

Citilink has just completed its 2010/11 management accounts. The directors are going to review the financial statements in the next board meeting. You have to prepare a FINANCIAL

Explain and compare the costs of hedging, Explain and compare the costs of ...

Explain and compare the costs of hedging via the forward contract and the options contract. Answer: There is no up-front cost of hedging through forward contracts. Though, in t

Determine net present value according to ezra solomon, Determine Net presen...

Determine Net present value according to Ezra Solomon " The gross present worth of a course of action is equal to the capitalised value of the flow of future expected benefit,

State about walk-through tests - auditor, Walk-through tests - Auditor ...

Walk-through tests - Auditor • "Walk-through tests" -That is tracing one or more transactions by accounting system and observing application of internal controls. Rev

Case Let 2, How would you judge the potential profit of Bajaj Electronics o...

How would you judge the potential profit of Bajaj Electronics on the first year of sales to booth Plastics and give your views to increase the profit?

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