In finance, the spread yield or credit spread is the difference between the rate of return offered on two different investments, usually from different credit quality but similar maturity. This is often an indication of the risk premium for one investment product over another. This phrase is a composite of results and dissemination.
"Distribution of X results over Y" is generally the percentage of annual yield to maturity (YTM) of financial instruments X minus YTM financial instruments Y.
There are several sizes of yield spread relative to the benchmark yield curve, including spreads of interpolation (I-spread), zero-volatility spread (Z-spread), and option-adjusted spread (OAS).
It is also possible to determine the result spread between two different maturities of a comparable bond. For example, if a particular bond with a 10 year maturity yields 8% and a comparable bond of the same issuer with 5 year maturity yields 5%, then the term premium between them can be quoted as 8% - 5% = 3%.
Video Yield spread
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The result spread analysis involves comparing the results, maturity, liquidity and creditworthiness of two instruments, or from one security relative to the benchmark, and tracking how a particular pattern varies over time.
As the yield spread widens between different bonds with different credit ratings, all others are equal, it indicates that the market is factoring in more risk of default on lower-grade bonds. For example, if the 10-year treasury note without risk currently yields 5% while the junk bonds with the same duration average 7%, then the spread between Treasuries and junk bonds is 2%. If the spread widens to 4% (increasing the yield of the bonds to 9%), then the market expects a greater risk of failure, possibly because of a weaker economic outlook for the borrower. The narrowing of yield spreads (between bonds with different risk ratings) implies that the market is factoring in less risk, probably because of an improved economic outlook.
The TED Spread is one of the most frequently cited credit spreads. The difference between ten-year-old Baa-rated corporate bonds and ten-year Treasury is another commonly cited spreadsheet.
Maps Yield spread
Consumer loans
The spread of results can also be an indicator of profitability for lenders who lend to individual borrowers. For consumer loans, especially home mortgages, the important difference of yield is the difference between the interest rate actually paid by the borrower with a particular loan and the lower (interest) rate that the borrower's credit will allow the borrower to pay. For example, if the borrower's credit is good enough to qualify for a 5% interest loan but receives a loan of 6%, then an extra 1% spread spread (with the same credit risk) translates into additional profit for the lender. As a business strategy, lenders usually offer a yield spread premium to brokers that identify borrowers willing to pay higher yield spreads.
See also
- I-spread
- Selected spreads
- Results curve
- Premium spread spreads
- Z-spread
Note
Source of the article : Wikipedia
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