wingkit1202
New Member
I am referring to the example "Computing the z-Spread" in Malz Chapter 7 "Spread Risk and Default Intensity Models". Let me copy the example here:
"We compute compute the z-spread for a five-year bullet bond with semiannual fixed-rate coupon payments of 7 percent per annum, and trading at a dollar price of 95.00. To compute the z-spread, we need a swap zero-coupon curve, and to keep things simple, we assume the swap curve is flat at 3.5 percent per annum. The spot rate is then equal to a constant 3.470 percent for all maturities..."
There are two points of confusion for me:
1. Does a "swap zero-coupon curve" mean the swap curve of a zero-coupon swap?
2. How can one derive the spot rate to be 3.470% from a flat swap curve flat at 3.5%?
Any thought? Thanks in advance.
"We compute compute the z-spread for a five-year bullet bond with semiannual fixed-rate coupon payments of 7 percent per annum, and trading at a dollar price of 95.00. To compute the z-spread, we need a swap zero-coupon curve, and to keep things simple, we assume the swap curve is flat at 3.5 percent per annum. The spot rate is then equal to a constant 3.470 percent for all maturities..."
There are two points of confusion for me:
1. Does a "swap zero-coupon curve" mean the swap curve of a zero-coupon swap?
2. How can one derive the spot rate to be 3.470% from a flat swap curve flat at 3.5%?
Any thought? Thanks in advance.
