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I'm comparing two types of discounting: Z-Spread and Discount Margin.

Reading the article by O'Kane Credit Spread Explained I found Z-Spread is used for fixed rate notes meanwhile Discount Margin, and Z-DM, are used for floating rate notes.

I got the two definitions:

  • Z-Spread: vertical parallel shift over the current zero rate curves
  • Discount Margin: vertical shift over the current XIBOR

My question is: why theoretically speaking is more correct to use Discount Margin for floating rate notes meanwhile I should use Z-Spread for fixed rate ones?

For floating rate notes, is it also correct to use the current zero rate curve for discounting and the forward curve for generating future cashflows?

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For floating-rate bonds, it is difficult to compute z-spread if you don't know their cash flows. As a result, you would use discount margin where you have an assumption for the future cash flows of the floater.

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