I was discussing with a colleague, but in short, how do you compare a fixed bond vs a loan/frn when it comes to spread? Theoretically, you should get paid more for holding fixed bonds, as you have duration risk, so in my view you need to take the z spread of said fixed bond, substract the equivalent maturity swap rate, and compare the result vs the DM/zDM of the loan/FRN. Is this right?


1 Answer 1


No. You can hedge the interest rate risk of a fixed-coupon instrument at immaterial cost. Don't discount a fixed-coupon instrument more than a floater because of the presense of additional interest rate risk.

Spread calculations such as Z-spread and OAS, if done correctly, are comparable for fixed-coupon and floating instruments without the need for further adjustments.

A Z-spread of a fixed-coupon bond is already approximately equal to its yield minus the swap rate at the bond's maturity (or, even better, minus a weighted average of swap rates if the bond amortizes or pays large coupon). Subtracting the swap rate once again won't give rise to an economically meaningful figure.

  • $\begingroup$ Thank you for that. So would it make more sense to compare a zDM to an ASW? $\endgroup$
    – Yuppity
    Commented Dec 2, 2023 at 15:31
  • 1
    $\begingroup$ Fully agree with this answer. $\endgroup$
    – Attack68
    Commented Dec 2, 2023 at 17:05
  • $\begingroup$ For rich-cheap comparisons of credit instruments, backing out and comparing their implied CDS spreads, like VCDS on Bloomberg, is sometimes most insightful. I should also add that although certain textbooks postulate that floaters never have interest rate risk, one can exercise critical thinking and actually calculate the interest rate risk of a high-yield loan: index+fixed spread, like 600 or 700 bps. It's big enough to warrant hedging if not wanted. Perhaps this is why in some markets, like Brazil, they prefere gearing index*g instead of index+s, for credit-risky floaters. $\endgroup$ Commented Dec 2, 2023 at 18:19

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