Spread
The yield differential between a bond and a benchmark — typically over comparable-maturity government bonds.
The exam’s favorite tell is which spread to use for a bond with an embedded option: OAS is the correct relative-value measure for callable/putable bonds because it strips out the option’s value, whereas the Z-spread does not. A classic item gives a callable bond’s Z-spread and option cost and asks for OAS — remember OAS = Z-spread − option cost for a callable (the issuer’s call has value, so OAS < Z-spread), while for a putable bond the option benefits the investor, so OAS > Z-spread. The trap is treating Z-spread and OAS as interchangeable: on an option-free bond they are equal, but only then.
Don’t reduce a spread to default risk alone — a credit spread compensates for credit and liquidity (and tax effects), so a wide spread isn’t purely default probability. Keep spread distinct from the treasury benchmark yield itself: the spread is the difference, whether measured over a single government bond (G-spread) or the swap curve (I-spread). Note the Z-spread is a constant add-on to every spot rate, not a single-point spread.
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