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Issuer Risk (Z-spread)
To assess the credit risk of a security, a synthetic indicator called “Z-Spread” is used, which represents the spread of the security against a risk-free interest rate curve.
The principle behind this indicator lies in the different assessment of a security with a certain degree of credit risk compared to a risk-free one. By discounting the future cash flows of a bond, it is possible to obtain its valuation at the current date
The Z-Spread indicates the spread to be added to the risk-free rate curve to obtain the price of the security. In particular, the riskier the security, the higher the Z-Spread.