The constant yield spread which when added to the point on the spot rate Treasury curve where a cash flow from a bond is received will make the price of the bond equal to the present value of its cash flows. In other words, each cash flow is discounted at the appropriate Treasury spot rate plus the static spread. The static spread is also known as a zero-volatility or Z-spread.
|||Static or Z-spread calculations are frequently used in mortgage-backed securities and other bonds with embedded options valuation. An option adjusted spread calculation, which is frequently used to value bonds with embedded options, is essentially a static spread calculation based on multiple interest rate paths and the prepayment rates associated with each interest rate path.
