Indiana Pi Bill - Revision history

68.173.104.173 at 23:14, 10 January 2015

2015-01-10T23:14:25Z

← Older revision		Revision as of 01:14, 11 January 2015
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96.229.233.53 at 06:08, 5 March 2014

2014-03-05T06:08:21Z

← Older revision		Revision as of 08:08, 5 March 2014
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	The '''Z-spread''', '''ZSPRD''', '''Zero-volatility spread''' or '''Yield curve spread''' on a simple [[mortgage-backed security]] (MBS) is the flat [[yield spread\|spread]] over the [[Treasury security\|treasury]] [[yield curve]] required in [[discounting]] a pre-determined coupon schedule to arrive at its present [[market]] [[price]].		The writer's name is Andera and she thinks it sounds quite great. Office supervising is exactly where my primary earnings arrives from but I've always wanted my personal company. Her family members life in Ohio but her spouse desires them to move. What me and my family adore is to climb but I'm considering on beginning some thing new.<br><br>Also visit my homepage - [http://1.234.36.240/fxac/m001_2/7330 tarot card readings]

	That is, the MBS yield curve spread is based on a comparison of the market price to a model of the bond which includes no variability in interest rate or mortgage [[Prepayment of loan\|repayment]] rates.

	~~== Definition ==~~

	For mortgage-backed securities, a model of typical repayment rates tends to be given; for example, the [[PSA prepayment model\|PSA]] formula for a particular [[Fannie Mae]] MBS might equate a particular group of mortgages to an 8 year [[Amortization (business)\|amortizing]] bond with a 5% mortality per annum. This gives a single series of [[Real versus nominal value (economics)\|nominal]] cash flows (like a riskless bond). If these payments are discounted to [[net present value]] with a static treasury yield curve the sum of their values will tend to ''overestimate'' the market price of the MBS. The [[parallel shift]], which, if applied to the yield curve makes the [[Net present value\|NPV]] of the anticipated receipts equal to the market price is the ''Yield curve spread''.

	~~The Z-spread of a bond is the number of [[basis point]]~~s one needs to add to the Treasury spot rates yield curve, so that the NPV of the bond cash flows (using the adjusted yield curve) equals the market price of the bond (after accounting for accrued interest). The spread is ~~calculated iteratively~~ and ~~improves the accuracy of the value calculation as~~ it ~~uses the entire yield curve to value the cash flows.~~

	If you calculate the present value of all future cash flows for a bond using prevailing spot rates, you may discover that the price you calculate is greater than the price observed in the market. This difference arises because the market price incorporates additional factors such as [[liquidity]] and [[credit risk]]. The Z-spread quantifies the impact of these additional factors. It is ~~the spread you need to add to the curve you are discounting with in order to generate a price that matches the market price.~~

	~~Conventionally, the zero rates are determined~~ from ~~the [[Treasury security\|Treasury]] curve, with semi-annual compounding~~.

	~~==The Problem with YTM spreads==~~

	Coupon Paying bonds are essentially portfolios of Zero Coupon Bond components and the Yield to Maturity of such instruments can be thought of as being a complex blend of the component Zero Coupon bond yields.
	~~It therefore can be observed that, for example,~~ in a positively sloped Yield Curve environment and comparing two bonds with the same cash flow dates and maturity, a higher coupon bond will offer a lower YTM than a low coupon bond. (The low coupon bond has cash flows more heavily influenced by a proportionally greater long term component).

	Thus two fairly and correctly priced corporate bonds from the same borrower and having the same cash flow dates and maturity may well have significantly different Yields to Maturity. It follows that when these Yields are compared to ~~that of a same-maturity benchmark, the resulting spreads may be markedly different~~. ~~It is the spread then~~ and ~~this type of methodology in finding it, that~~ is ~~at fault and not the bonds or the market.~~


	~~This measures the spread the investor or trader would capture over the entire benchmark Zero curve if the bond was held~~ to maturity. The Z-spread is calculated as the spread that will make the present value of cash flows from the non-benchmark security when they are discounted at the benchmark Zero rates (plus the Z-spread) equal to the non-benchmark security'~~s price. This is done by trial and error. This is different than the nominal spread because the nominal spread just uses one point~~ on ~~the curve~~.

	For example, take the spot curve and add 50 basis points to each rate on the curve. If the two year spot rate is 3%, the rate you would use to find the present value of that cash flow would be 3.50%. After you have calculated all of the present values for the cash flows, add them up and see whether they equal the bond's price. If they do, then you have found the Z-~~spread, if not, you have to go back to the drawing board and use a new spread until the present value of those cash flows equals the bond's price.~~

	~~==The Advantage of Z-Spread==~~
	As the Z-Spread is not dependent upon only one point on the Yield Curve and takes account of all of the relevant term-structure, the distortions of Yield-to-Maturity spreads outlined above are eliminated. It is then a measure of Credit Spread without the distortions of YTM. It is widely used in the CDS and other markets by non bond traders who want a fair reading of Credit Spread undistorted by the complexities of individual bonds.

	~~==Benchmark for CDS Basis==~~
	The Z Spread is widely used as the 'cash' benchmark for the calculation of the CDS Basis. The CDS basis is commonly the CDS Fee minus the Z Spread for a bond of the same maturity. For the example, 10 Year RBS CDS is currently 199.7 {{Not a typo\|bps}}, the Z Spread for their 10 year Global bond is 286.8, giving a negative basis of -87.1{{Not a typo\|bps}}.

	~~==Example==~~
	~~Assume that a bond has three cash flows~~: ~~$5 on 1/1~~/~~2009; $5 on 1~~/1~~/2010; and $105 on 1/1/2011~~.

	~~The corresponding zero rates (compounded semiannually) are 4~~.~~5% on 1/1/2009, 4~~.~~7% on 1~~/1/~~2010 and 5% on 1~~/~~1/2011.~~

	~~Assuming that the [[accrued interest]] is 0, and the Z-spread is 50 [[basis point]]s (bp), the price ''P'' of this bond on 1/1/2008 is given by:~~

	~~:<math>~~
	~~\begin{align}~~
	~~P & = \frac{5}{(1 + \frac{4.5% + 50\mathrm{bp}}{2})^{(2 \times 1)}}~~
	~~+ \frac{5}{(1 + \frac{4.7% + 50\mathrm{bp}}{2})^{(2 \times 2)}}~~
	~~+ \frac{105}{(1 + \frac{5.0% + 50\mathrm{bp}}{2})^{(2 \times 3)}} \\~~
	~~& = 98.49861 \\~~
	~~\end{align}~~
	~~</math>~~

	~~==See also==~~
	* [[Option-adjusted spread]]
	* [[I-spread]]

	~~==References==~~
	* Frank J. Fabozzi, The Handbook of Fixed Income Securities, 7th edition; McGraw-Hill; 2005

	~~{{Bond market}}~~

	~~{{DEFAULTSORT:Z-Spread}}~~
	~~[[Category:Finance]~~]

en>Graham87: copyedit

2014-01-05T11:50:45Z

copyedit

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en>Zipz0p: The mathematical constant pi and methods to determine its value are not scientific, but mathematical.

2012-08-06T18:52:22Z

The mathematical constant pi and methods to determine its value are not scientific, but mathematical.

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