Z-Spread: Fixed number of basis points that would be added to the gilt yield curve at all durations so that the present value of a bond’s future payments equals its market price. Z-spread is a measure of a bond’s credit risk. Therefore, it will be zero for gilts and high for low-quality corporate debt. (See also nominal spread, option-adjusted spread.)
Zero Cost: Simultaneous purchase and sale of options on the same underlying security for the same period, with the same premium, but at different strike prices. Hence, instruments such as zero-cost collars (see collar hedge) can be engineered.
Zero Coupon Bond: A bond that pays no interest while the investor holds it. It is sold originally at a substantial discount from its eventual maturity value, paying the investor its full face value when it comes due, with the difference between what he paid initially and what he finally collected representing the interest he would have received over the years it was held.
Zero Coupon Yield Curve: A yield curve of zero coupon bonds. Market practice is often to derive this curve theoretically from the par yield curve. Frequently used to derive discount factors. Also known as the spot yield curve.
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