CFAI define I-Spreads as 1) interpolated spreads, which reference a linearly interpolated yield. 2) Additionally, they are defined as bond rates net of SWAP RATES of the same maturities (according to the CFAI!).
Therefore, for the purposes of the CFA, I-Spread is basically (as defined above) the same thing as Z-Spread, except that it is the spread to the respective SWAP RATE given a particular maturity (instead of the spot rate).
On the other hand, my colleague says I-Spread can be defined as a spread that reference ANY linearly interpolated yield, so it does not have to be the spread to the swap curve. This also makes sense if one were to reference the CFAI’s first definition of I-Spread. However, this is incorrect once you reference CFAI’s the second definition of I-Spread.
Can someone please clarify the meaning of I-Spread for CFA purposes, and (if possible) your world applications as per your experience?
Thank you.
I took the novel – some might go so far as to say daring – approach of looking up I-spread in the index of volume 5 of the 2018 Level II CFA curriculum. Thence to page 29, footnote 6, which told me that the I-spread for a bond is the difference between its YTM and the swap rate for the same maturity, where the swap rate may have to be interpolated (hence, the “I” in “I-spread”) between standard swap maturities, with that interpolation being linear.
I like to live on the edge.
thank you again my good sir
This is actually something that irritates me, but it isn’t the CFA’s fault. I-spread has several definitions depending on what universe you’re operating in. For example, if you work with MBS and know anything about CMOs, they are quoted using I-Spread and PSA (i.e. they might say this CMO has I-spread 60, PSA 236) which you use to imply a price. In that world, I-spread is…wait for it…spread to *Treasuries* not swaps (in MBS the spread to swaps is called the N-spread).
However, in the context of bonds, I-spread is to swaps and G-spread is to treasuries and N-spread is not a thing. It’s really confusing, but sadly this is a feature of the market so CFA is doing the best it can with a tough situation.
So OP I think that’s what your friend is getting at? Depending on the context, I-spread could mean to treasuries or to swaps. Before I started Level 2, I would have told you it’s to treasuries. 
Another fun disagreement in the market: should OAS be a spread relative to treasuries or to swaps?
@S2000magician Thank you very much - really helpful.
I’ve always found calling it an interpolated spread more confusing than helpful, given you can also have an interpolated g-spread for example. Maybe calling it an interpolated-swap spread (IS-spread) would be more intuitive?!