Z-Spread (Zero-Volatility Spread)

The Z-Spread (Zero-volatility Spread) is the constant spread added to every point on the zero (spot) curve such that discounting all cash flows at (zero rate + Z-Spread) reproduces the bond's market dirty price. Unlike G-Spread (which uses a single benchmark yield), Z-Spread discounts each cash flow separately at the corresponding zero rate plus the constant spread — it's a term-structure-consistent measure. For option-free bonds, Z-Spread > G-Spread slightly because the zero curve is upward sloping (the spread compensates over shorter, lower-rate nodes). For callable bonds, Z-Spread = OAS + Option Cost: the extra spread over OAS compensates for call risk stripped out by OAS. CFA Level II tests Z-Spread as the intermediate spread between G-Spread (simplest) and OAS (most sophisticated).