Z-Spread, OAS & Asset Swap Spread Lab
Decompose bond credit risk by discounting cash flows over the benchmark spot curve. Compute exact Zero-Volatility Spread (Z-spread), Option-Adjusted Spread (OAS), Nominal Spread, and Par-Par Asset Swap Spread (ASW).
Presets:
Bond & Curve Parameters
Z-Spread (Zero-Vol)
124 bps
+1.24% over spot
Nominal Spread (G)
118 bps
Z-Spread +6 bps
Option-Adjusted (OAS)
124 bps
Option cost: 0 bps
Asset Swap (ASW)
121 bps
Bond YTM: 5.45%
Blue: Benchmark Spot Curve $s(t)$ | Red Dashed: Z-Spread Discount Curve $s(t) + Z$
Spread Comparison: Nominal Spread vs. Z-Spread vs. OAS vs. Par-Par ASW
Cash Flow Present Values: Undiscounted vs. Spot Discounted vs. Price-Matching (Spot + Z)
Cash Flow Discounting Schedule & Spot Decomposition
| Period | Year $t$ | Cash Flow ($) | Spot Rate $s(t)$ | Discount $s(t)+Z$ | PV Factor | Discounted PV ($) |
|---|
Sensitivity: Clean Price vs. Spot Curve Shift (Z-Spread in bps)
Sensitivity: Coupon Rate vs. Option Cost (OAS in bps)
Self-Assessment: Bond Spread Mastery
Related Fixed Income & Yield Curve Simulators
Frequently Asked Questions: Z-Spread, OAS & ASW
The Nominal Spread is simply the difference between a bond's Yield to Maturity (YTM) and the benchmark Treasury yield at the bond's maturity tenor. This assumes a single flat discount rate across all cash flows. In contrast, the Zero-Volatility Spread (Z-spread) is the exact constant spread that must be added to every zero-coupon spot rate across the entire benchmark curve so that the discounted value of all coupon and principal cash flows equals the bond's observed dirty price: P = Sum(CF_t / (1 + (s_t + Z)/m)^(m*t)). On steep upward-sloping yield curves, Z-spread is typically wider than nominal spread because cash flows arriving earlier are discounted at lower spot rates.
For a bond with embedded options (such as a callable or putable corporate bond), the Z-spread includes compensation for both credit/liquidity risk and embedded option risk. For a callable bond, the issuer holds the right to call back the bond if rates drop, capping investor capital gains. The Option-Adjusted Spread (OAS) strips out the value of this embedded call option: OAS = Z-spread - Option Cost (in bps). If OAS exceeds the spread of comparable bullet bonds, the bond offers attractive pure credit compensation after adjusting for the option.
An Asset Swap (ASW) synthetically transforms a fixed-rate bond into a floating-rate note (FRN) by pairing the bond with an interest rate swap. In a standard par-par asset swap, an investor buys the bond at market price and enters a swap paying fixed bond coupons in exchange for receiving floating reference rate (SOFR or Euribor) plus the asset swap spread (ASW). ASW reflects net funding and credit basis relative to the interbank swap market.
Because intermediate coupons in an upward-sloping yield curve environment are discounted at spot rates lower than the terminal maturity yield, discounting with the single terminal yield underestimates early coupon present values. To match market price, the constant spread added to spot rates (Z-spread) must be higher than the single-point yield spread. Conversely, on an inverted yield curve, early spot rates exceed terminal rates, causing Z-spread to be lower than nominal spread.