• Fixed Income

    The relationship between Z-spread and bond income

    We derive a “quick-and-dirty” formula for predicting an annualized bond income from the bond’s Z-spread. In particular, it is pointed out that it can be a very bad idea to compute this value by simply multiplying the Z-spread with the bond’s nominal – even though this is sometimes done in the marketplace. Concerning implications, such an annualized income computation is an integral part of the negative basis measurement according to the so-called Z-spread methodology, which should be adjusted according to the suggestions of the present note.