What does the Z spread add to spot rates?

The Z spread adds a constant amount to spot rates, which is used to discount a bond's cash flows to their present value. The Z spread, also known as the zero-volatility spread, is the constant yield spread that would need to be added to the risk-free spot rate curve to equate the present value of a bond's cash flows to its market price. This consistency allows for more straightforward valuation and comparison across different bonds, particularly when assessing their credit risk relative to risk-free securities.

The method of using a constant spread is particularly useful in simplifying calculations and allows investors to easily determine the additional yield they are earning for taking on risk compared to the risk-free rates represented by the spot curve.