Business, Legal & Accounting Glossary
The difference between the yields on two bonds.
Yield spread is the different between the yields of two bonds.
The bonds may be of different maturity, from issuers with different risk characteristics, have different principals or offer different coupon payments.
The term yield spread is the name given to the difference between two different yields, or rates.
What yields depends upon the context in which the term yield spread is used. In talking about the yield curve, a bond market analyst may be a comment on the yield spread between the two and ten-year treasuries. A mortgage broker is often compensated by the difference between the wholesale rate on the loan and the rate paid by the borrower, called the yield spread premium. The financial significance of a given yield spread is relative to the norm for that pair of yields. The larger the difference in yield spread from the norm, the greater the profit or loss for an entity sensitive to variation in that yield spread. A yield spread can also shrink to zero then begin to expand in the opposite direction, as happens in the case of a negative yield curve.
credit spread
The yield spread, also known as the credit spread, is the difference between the yields of two investments in terms of credit quality and the risk of investing in one debt instrument instead of another instrument.
The yield spread is measured in basis points (bps) and enables bond investors to compare the yield, maturity, liquidity and solvency of two debt instruments. For instance, the yield of a municipal bond is 7.50%, and the yield of a corporate bond is 8.50%.
The difference between the two yields is: 8.50% – 7.50% = 1% or 100 basis points (one basis point = 0.01%). However, a corporate bond is riskier and has a shorter maturity than a municipal bond. All these factors are taken into consideration when comparing one security over another using the yield spread.
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This glossary post was last updated: 28th December, 2021 | 0 Views.