Lesson 5 of 5 · 14 min
I-spread, Z-spread and option-adjusted spread
The I-spread measures a bond's yield over the swap rate, the Z-spread is a constant spread added to every spot rate, and the OAS takes the value of an embedded call out of the Z-spread.
In short
- I-spread (interpolated spread) = YTM − swap rate of the same currency and tenor. Common for euro corporate bonds (quoted as 'mid-swaps + x bps').
- Issuers use the I-spread to compare fixed-rate funding with floating alternatives; investors use it as a gauge of credit risk.
- G- and I-spreads compare two single yields; the Z-spread is a constant spread over each benchmark spot rate that prices the bond.
- The Z-spread is also called the static spread: it has zero volatility.
- OAS = Z-spread − value of the embedded call option in bps per year; for a callable bond, OAS < Z-spread.
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