Asset-Swap Spread (ASW) & Zero-volatility spread ( Z-spread)

Definition ASW

The difference between the yield of a bond and the LIBOR curve, expressed in basis points. The asset-swap spread is designed to show the credit risk associated with the bond. Analysts will typically look at both the Z-spread and the asset-swap spread to see if there are discrepancies in a bond’s price. Unlike the Z-spread, the asset-swap spread is calculated using the bond’s yield to maturity.

Definition Z-spread

Zero-volatility spread. A tool used in the analysis of an asset swap that uses the zero-coupon yield curve to calculate the spread. The Z-spread is the number of basis points that would have to be added to the spot yield curve so that the bond’s discounted cash flows equal the bond’s present value. Each cash flow is discounted using its maturity and the spot rate for that maturity term, so each cash flow has its own zero-coupon rate. Analysts will typically look at both the Z-spread and the asset-swap spread to see if there are discrepancies in a bond’s price. For short-term debt and high-rated debt there tends to be little difference between the two spreads. If there is a large difference between the two spreads then the market is not pricing the bonds accurately. also called static spread.
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2 comments

  1. […] Asset-Swap Spread (ASW) & Zero-volatility spread ( Z … – Zero-volatility spread. A tool used in the analysis of an asset swap that uses the zero-coupon yield curve to calculate the spread. The Z-spread is the number of …… […]

  2. […] Asset-Swap Spread (ASW) & Zero … – Definition ASW The difference between the yield of a bond and the LIBOR curve, expressed in basis points. The asset-swap spread is designed to show the credit … […]

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