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?