Asset-swap spreads zero-coupon curve

The zero-coupon curve is used in the asset-swap analysis, in which the curve is derived from the swap curve. Then, the asset-swap spread is the spread that allows us to receive the equivalence between the present value of cash flows and the current market price of the bond. 

The conventional approach for analyzing an asset swap uses the bonds yield-to-maturity (YTM) in calculating the spread. The assumptions implicit in the YTM calculation (see Chapter 2) make this spread problematic for relative analysis, so market practitioners use what is termed the Z-spread instead. The Z-spread uses the zero-coupon yield curve to calculate spread, so is a more realistic, and effective, spread to use. The zero-coupon curve used in the calculation is derived from the interest-rate swap curve. 

Put simply, 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 the bond are equal to its present value (its current market price). Each bond cash flow is discounted by the relevant spot rate for its maturity term. How does this differ from the conventional asset-swap spread Essentially, in its use of zero-coupon rates when assigning a value to a bond. Each cash flow is discounted using its own particular zero-coupon rate. The bond s price at any time can be taken to be the market s value... 

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See also in sourсe #XX -- [ ]

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