Free CFA Certification Practice Questions:


A $100 par value, semiannual coupon bond with exactly 2 years to maturity and a coupon rate of 12% is selling for $109.15. Given the following US Treasury bond data, what is the zero-volatility spread for this bond?



A) 50 basis points

B) 150 basis points

C) 200 basis points

  • [Ans: C]


    • The Z-spread is calculated as the spread that will make the present value of the cash flows from the non-Treasury bond, when discounted at the Treasury spot rate plus the spread, equal to the non-Treasury's bond price. A trial-and-error procedure is required to determine the Z-Spread.

    When 200 basis points is added to each of the spot rates, the bond value equals $109.15.

    N = 1, I/Y = (2% + 2%) / 2, PMT = 0, FV = 6 --> CPT PV = $5.882

    N = 2, I/Y = (3.536% + 2%) / 2, PMT = 0, FV = 6 --> CPT PV = $5.681

    N = 3, I/Y = (4.413% + 2%) / 2, PMT = 0, FV = 6 --> CPT PV = $5.458

    N = 4, I/Y = (5.135% + 2%) / 2, PMT = 0, FV = 106 --> CPT PV = $92.133

    Bond Value = 5.882 + 5.681 + 5.458 + 92.133 = $109.15






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