CFA Level I terms: Z

A curve is not flat, so that is crude. The Z-spread uses the whole spot curve.

G-spread, I-spread, Z-spread and option-adjusted spread Fixed Income

A Z-tranche (accrual or accretion bond) pays nothing at first. Each period its stated coupon is added to its principal, until a set date when principal and interest start to be paid.

Mortgage pass-throughs and CMOs Fixed Income

The set of them, plotted against maturity, is the spot curve. It is also called the zero curve, or the strip curve, because the coupons of a government bond can be "stripped" off and sold separately as zeros.

Spot rates and pricing a bond with the spot curve Fixed Income

Because it prices a bond with no coupons, it is also called the zero rate. For a one-period instrument the yield to maturity and the zero rate are the same.

Implied forward rates from spot rates Derivatives

F₀(T) is chosen so that the contract is worth nothing to either side when it is agreed, a state called zero value at inception.

Forward contracts: payoff for the long and the short Derivatives

A zero-coupon bond pays nothing until maturity, when it repays the face value. It is also called a discount instrument, because it is sold below face value and the investor's whole return is the gap.

Pricing bonds: zero-coupon, coupon and perpetual Quantitative Methods

Zero-coupon bonds pay no coupons. They are sold below par (while rates are positive) and repaid at par, so the whole return is the climb to par.

Floating, step-up, inflation-linked and zero-coupon bonds Fixed Income

The three non-market factors are returns on zero-investment portfolios: long one group of stocks, short an equal amount of another, so no net money goes in.

Arbitrage pricing theory and multi-factor models Equities

Parametric VaR is normally computed with a mean daily return of zero, the zero-mean convention. A zero mean usually cannot be statistically rejected for daily data, and the daily standard deviation is far larger than the daily mean, so best practice leaves drift out of the parametric calculation.

Historical simulation and historical value at risk Quantitative Methods