What is Z-Spread (Zero-Volatility Spread)?
Z-Spread (Zero-Volatility Spread) is the constant spread that, when added to each point on the Treasury zero-coupon yield curve, makes the present value of a loan's projected cashflows equal to its current market price. Unlike a simple yield spread over a single Treasury, Z-Spread accounts for the shape of the entire yield curve. However, Z-Spread does not adjust for prepayment optionality; it assumes a single static prepayment scenario. This makes it a useful but incomplete measure for assets with embedded options.
Formula
Price = Sum of [CF(t) / (1 + r(t) + Z)^t] Where r(t) is the zero-coupon Treasury rate at time t, Z is the Z-Spread, and CF(t) is the projected cashflow
How LoanBook Uses Z-Spread
The Z-Spread LoanBook shows beside OAS is solved on the same Hull-White run at the path-mean prepayment speed, so Option Cost = max(Z-Spread - OAS, 0) reconciles by construction. The deterministic spread of the no-loss BEY over the Treasury yield at the WAL is reported separately as the UST Spread. Both are displayed in portfolio analytics and CU participation pricing.
Frequently Asked Questions
When should I use Z-Spread vs OAS?
Use Z-Spread for quick relative value comparisons between similar assets. Use OAS when comparing assets with different prepayment profiles; OAS strips out the option cost so you're comparing pure credit and liquidity premiums.
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