Don’t waste your time – keep track of how NFP affects the US dollar!

Thank you for visiting our website

The ASIC policy prohibits us from providing services to clients in your region. Are you already registered with FBS and want to continue working in your Personal area?

Personal area

Facebook like

Yield Spread

Yield Spread

Usually, debt instruments with different characteristics (maturity date/credit rating or risk) have different yields. Let’s take bond yields as an example and analyse the risks related to them. The bond yield is the return rate, which bond holders get if they have this bond until maturity and receive the cash flows at the promised dates. The risks include credit risk, interest rate risk, inflation risk, etc.

We can divide the measures of yield spread into the nominal spread (G-spread), interpolated spread (I-spread), zero-volatility spread (Z-spread) and option-adjusted spread (OAS).

G-spread

Nominal spread (G-spread) represents the difference between Treasury bond yields and corporate bond yield with the same maturity. Treasury bonds have zero default risk. That is why the difference between corporate and Treasury bonds show the default risk. We can calculate the G-spread by using the following formula:

G-Spread = corporate bond’s yield – government bond’s yield

I-spread 

Interpolated spread (I-spread) is the difference between a bond's yield and the swap rate. We can use LIBOR as an example. It shows the difference between a bond's yield and a benchmark curve. If the I-spread increases, the credit risk also rises. I-spread is usually lower than the G-spread. 

Z-spread 

This type of spread is also known as a zero-volatility spread. It is the spread that is added to each spot interest rate to cause the present value of the bond cash flows to equal bond’s price. 

Option-adjusted spread

The option-adjusted spread is calculated as zero-volatility spread minus the call option’s value. There is a term “spread” in the Forex market, too. It is referred to the commission you pay a broker. The Forex spread is calculated as a difference between the bid and ask prices.

Back

Be on top of your game

Got questions? FBS Oceania Customer Support is ready to help!

Contact us via email at support@fbsaustralia.com

or

Start Live Chat