yield spreads

CFA Level I Fixed Income
#1

Im unable to precisely understand the difference between difgerent kinds of yield spreads such as nominal , z spread , current yield , oas , option cost for call and put. Please help. Thanks in advance

#2

Here you go:

  • Nominal spread : the difference between the YTM on a risky bond and the YTM on a risk-free bond of the same maturity. Think of this as a spread you add to the Treasury _ par _ yield curve so that when you discount the risky bond’s cash flows at the Treasury-yield-plus-spread rate you get today’s price on the risky bond.
  • Z-spread : the spread you add to each point on the Treasury _ spot _ yield curve so that when you discount the risky bond’s cash flows at the Treasury-yield-plus-spread rates you get today’s price on the risky bond.
  • Current yield : the annual coupon on a bond divided by today’s price on that bond; it’s a poor yield measure.
  • OAS : the spread you add to each point on a binomial interest rate tree (developed from the Treasury _ spot _ curve) so that when you discount the risky bond’s cash flows at the Treasury-yield-plus-spread rates (and incorporate a rule for when any embedded options will be exercised) you get today’s price on the risky bond. The OAS removes the value of the option, and is the measure you must use for a bond with embedded options.
  • Option cost : = Z-spread – OAS; this is positive for an option owned by the issuer (e.g., call option, cap on a floater, prepayment option) and negative for an option owned by the bondholder (e.g., put option, floor on a floater, conversion option).
#3

Thank you sir

#4

What’s the difference b/w the Treasury par curve and the Treasury spot curve?

Thanks in advance.

#5

The par curve gives the YTM for coupon-paying bonds at each maturity.

The spot curve gives the discount rate for a single payment at each maturity; it would be the YTM for a _ zero _-coupon bond at each maturity.