Corporate Bond Spreads: Z-Spread, OAS & ASW

A corporate bond trades at a spread to government rates because investors demand compensation for credit risk — but that spread can be measured in several non-equivalent ways, and confusing them leads to bad relative-value calls. This course gives you the mechanics of every major spread measure — Z-spread, option-adjusted spread, asset swap spread and I-spread — derived from first principles so you know exactly what each one is capturing and when to use it.

The Z-spread is the starting point: a parallel shift to the risk-free discount curve that matches a risky bond's market price. From there the course introduces survival-probability-adjusted discounting, the credit triangle that connects par CDS spread, hazard rate and recovery, and the calibration of a hazard rate directly from the CDS market. Understanding that linkage is what lets you identify when a bond is rich or cheap to its CDS hedge.

The course also covers the asset swap spread — the floating spread over SOFR that makes the swap package par — because ASW is the dominant spread measure for investment-grade practitioners who actually hedge with swaps. By the end you can decompose any IG corporate bond price into its risk-free component and its credit compensation, cross-check it against the CDS market, and build the toolkit to do the same for an entire portfolio.

The project starts with a SOFR-based risk-free curve and a set of investment-grade corporate bonds at market prices. You first implement risky bond pricing using survival-probability-adjusted discounting: each cash flow is multiplied by the probability that the issuer has not defaulted before that payment date, and discounted at the risk-free rate plus an assumed recovery-adjusted loss rate.

You then build solvers for each of the four spread measures. The Z-spread solver uses Brent's method to find the parallel shift to the SOFR curve that reproduces the market price. The OAS solver additionally strips an embedded call option priced by a short-rate model before solving for the residual credit spread. The par ASW solver constructs the swap that exchanges the bond's fixed cash flows for SOFR-flat and solves for the floating margin that makes the package worth par.

In the final stage you calibrate hazard rates from the issuer's CDS par spreads — using the credit triangle approximation for a quick sanity check and a full NPV bootstrap for accuracy — then use those hazard rates to re-price the bond and compare the implied spread to your Z-spread. The completed toolkit flags rich/cheap signals across a portfolio of bonds and outputs a spread-comparison table that a credit analyst would find immediately usable.