Does Z spread for a same bond, when calculated at different time periods changes at different term to maturity?
For example lets say we are valuing a bond on January 2000 that will mature in January 2010 bond. Lets say z spread for the bond is 100 bps at Jan 2000. Will Z spread be the same when we will value the same bond on January 2005?
There’s no reason to believe that the spread will remain constant for any length of time; it can change month to month, week to week, or even day to day.
@S2000 Magician
Sorry i dint get your point?
Why does it change with time if it’s static spread?
Can you share some link or brief info regarding that?
With reference to my above question, there is an assumption that interest rate doesn’t change for the time period.
The z-spread is defined as the constant basis point spread that would need to be added to the implied spot (zero) yield curve so that the discounted cash flows of a bond are equal to its current market price.
The market price of a bond does change when interest rates change (specifically, all else held the same, bond prices and interest rates are inversely related)
However, even under the assumption of no interest rate changes, the price of a bond can change over time for other reasons - for example, the credit quality of the issuer declines/improves or the price of the bond is simply approaching par (if it was originally issued at a discount or premium) or the value of an embedded option in the bond changes.
So there really isn’t any reason that the z-spread has to necessarily remain constant.
Bond Price Changes -> Z-spread changes
The z-spread is a measure of the riskiness of the bond investment compared to an investment in Treasuries.
The point is that the risk changes for lots of reasons. There are many components to the overall risk: default risk, liquidity risk, yield curve risk, event risk, interest rate risk, reinvestment risk, volatility risk, and so on. If any of those should change, the z-spread will change. And, more to the point, if the market’s perception of any of those risks should change, of if the market’s overall risk aversion should change, the z-spread will change.
Thanks @ S2000 and Iampossible 
I’ve another doubt. In case of interest changes we consider OAS that removes the sensitivity of interest rate volatility, considering a bond trading at par and everything about the bond remains constant i.e all the risks remain constant (Credit, liquidity, default etc), so in these ideal conditions OAS must remain constant throughout maturity? Please clarify me on this. Thanks
The one thing that doesn’t – indeed, cannot – remain constant is the time to maturity; it continually shortens. Given that, the spread will be added to a continually shorter version of the Treasury (spot) yield curve. It’s incredibly unlikely that the OAS would remain constant over time, even if everything else (except time to maturity) remains unchanged.
Ohhh, yes…thanks
Therefore in that case, assuming all the things constant, OAS must decrease with time as the bond is approaching maturity?
It may decrease, but, I suppose, it could increase as well.
I wouldn’t worry about it too much.