DEFINITION of 'Static Spread'
The static spread is the constant yield spread above the spot rate Treasury curve which equates the price of the bond to the present value of its cash flows. In other words, each cash flow is discounted at the appropriate Treasury spot rate plus the static spread.
The static spread is also known as a zerovolatility spread or Zspread.
BREAKING DOWN 'Static Spread'
The yield spread is the difference in yields between two yield curves. The yields on a yield curve which includes Treasury bills, notes, and bonds, are called the Treasury spot rates. The spread is the amount of yield that will be received from a nonTreasury bond above the yield for the samematurity Treasury bond. For example, an investor is comparing the Treasury yield curve to a corporationâ€™s yield curve. The interest rate on 2year Tnotes is 2.49% and the yield on the comparable 2year corporate bond is 3.49%. The yield spread is the difference between both rates, which is, 1% or 100 basis points. The spread is said to be constant because it is the same for any period.
A constant or static spread of 100 basis points means that adding 100 basis points to the Treasury spot rate that applies to the bond's cash flow (interest payments and principal repayment) will make the price of the bond equal the present value of its cash flows. Each cash flow is discounted at a rate equal to the Treasury spot rate that applies to the cash flow's period plus 100 basis points.
In effect, the present value of the nonTreasury bond uses a different discount factor for each cash flow. The same spread is added to all riskfree spot rates. The derived value is a static spread above all the different Treasury yields if the security is held to maturity.
Static spread is calculated by trialanderror. An analyst or investor would have to try different numbers to figure out which number when added to the present value of the nonTreasury security's cash flows, discounted at the Treasury spot rate, will equal the price of the security in question. For example, take the spot curve and add 50 basis points to each rate on the curve. If the twoyear spot rate is 2.49%, the discount rate you would use to find the present value of that cash flow would be 2.99% (calculated as 2.49% + 0.5%). After you have calculated all the present values for the cash flows, add them up and see whether they equal the bond's price. If they do, then you have found the static spread; if not, you have to go back to the drawing board and use a new spread until the present value of those cash flows equals the bonds price.
The static spread differs from the nominal spread in that the latter is calculated on one point on the Treasury yield curve, while the former is calculated using a number of spot rates on the curve. This translates to discounting each cash flow using its period to maturity and a spot rate for that maturity.
Static or Zspread calculations are frequently used in mortgagebacked securities (MBS) and other bonds with embedded options. An option adjusted spread (OAS) calculation, which is frequently used to value bonds with embedded options, is essentially a static spread calculation based on multiple interest rate paths and the prepayment rates associated with each interest rate path. The static spread is also widely used in the credit default swap (CDS) market as a measure of credit spread that is relatively insensitive to the particulars of specific corporate or government bonds.

Nominal Yield Spread
The nominal yield spread is the difference between a Treasury ... 
Yield Spread
A yield spread is the difference between yields on differing ... 
Spot Rate Treasury Curve
The spot rate treasury curve is a yield curve constructed using ... 
Spread
The difference between the bid and the ask price of a security ... 
Curve Steepener Trade
Curve steepener trade is a strategy that uses derivatives to ... 
Spread Option
A spread option is a derivative based on the value of the difference, ...

Investing
How Bond Market Pricing Works
Want to know how bond price are determined? Learn the basic rule of the bond market. 
Investing
Corporate Bonds: An Introduction to Credit Risk
Understand how corporate bonds often offer higher yields, and discover how it is important to evaluate the risk, including credit risk, that is involved before you buy. 
Investing
Bond yield curve holds predictive powers
This measure can shed light on future economic activity, inflation levels and interest rates. 
Investing
Find the Right Bond at the Right Time
Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity. 
Insights
Four Scenarios: Fed Policy, the Yield Curve and Recessions
If you were to compile a list of the most effective recession predictors, the term spread, or difference between short and longterm interest rates, would likely be at the top of that list. 
Investing
The Bank Stocks Have Come Too Far Too Fast
The bank sector has been buoyed by expectations of higher interest rates, but the rally justified? 
Investing
The Importance Of U.S. Treasury Rates
U.S. Treasury bond interest rates affect more than just bondholders! It impacts the day to day lives of all consumers. 
Trading
SpreadtoPip Potential: Which Pairs Are Worth Day Trading?
Learn how spreads play a significant factor in profitable forex trading. Find out when it's worth trading and when it isn't. 
Tech
The Exciting World Of The Top Spread Betting Brokers
Spread betting can be fun, but it's risky and you will want a reliable broker. Here are the top spread betting brokers. 
Investing
Understanding the Different Types of Bond Yields
Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.

What is the difference between an optionadjusted spread and a Zspread in reference ...
Learn about the difference between the Zspread and optionadjusted spread valuations of future cash flows for bonds, and ... Read Answer >> 
What is the current yield curve and why is it important?
Understand what the current yield curve represents, and learn how market analysts commonly interpret various changes in the ... Read Answer >> 
What is the difference between term structure and a yield curve?
Understand the difference between the term structure of interest rates and a yield curve, if any. Learn what the yield curve ... Read Answer >> 
Which economic factors impact Treasury yields?
Learn about the economic factors that impact Treasury yields. These yields are the benchmark yield for debt notes around ... Read Answer >> 
What does market segmentation theory assume about interest rates?
Learn about how the market segmentation theory for different maturities of interest rates seeks to describe the shape of ... Read Answer >>