Z-spread - Financial definition
Concise definition of the term z-spread
The Z-spread is the basis-point spread that would need to be added to the implied spot yield curve such that the discounted cash flows of a bond are equal to its present value (its current market price).
Comprehensive definition of the term z-spread
Each bond cash flow is discounted by the relevant spot rate for its maturity term.
The z-spread calculation differs from the calculation of the conventional asset-swap spread in that it uses zero-coupon rates when assigning a value to a bond.
In practice, the Z-spread, especially for shorter-dated bonds and for better credit-quality bonds, does not differ greatly from the conventional asset-swap spread. The Z-spread is usually the higher spread of the two, following the logic of spot rates, but not always. If it differs greatly, then the bond can be considered to be mispriced.