Compare, Calculate, and Interpret Yield Spread Measures - AnalystPrep | CFA® Exam Study Notes (2024)

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What is yield spread measures and compare? ›

A yield spread is a difference between the quoted rate of return on different debt instruments which often have varying maturities, credit ratings, and risk. The spread is straightforward to calculate since you subtract the yield of one from that of the other in terms of percentage or basis points.

Money market yield is calculated by taking the holding period yield and multiplying it by a 360-day bank year divided by days to maturity. It can also be calculated using a bank discount yield.

The calculation for a yield spread is essentially the same as for a bid-ask spread – simply subtract one yield from the other. For example, if the market rate for a five-year CD is 5% and the rate for a one-year CD is 2%, the spread is the difference between them, or 3%.

A G-spread or an I-spread can be based on a specific benchmark rate or on a rate interpolated from the benchmark yield curve. A Z-spread (zero-volatility spread) is based on the entire benchmark spot curve.

In finance, the yield spread or credit spread is the difference between the quoted rates of return on two different investments, usually of different credit qualities but similar maturities. It is often an indication of the risk premium for one investment product over another.

The yield spread is the difference in yield between a bond yield and the risk-free rate (a notional rate offered by an investment with the lowest level of risk), or between two comparable assets. The spread is equivalent to the risk differential between each investment.

Percent Yield Equation

To find the yield percent we use the equation: percent yield = actual yield/theoretical yield x 100.

In the realm of finance and investment, the term "spread" holds significant importance. It denotes the disparity between two prices, rates, or yields. Essentially, it's a measure of the gap between the buying and selling price of an asset or the variance in yields of two distinct financial instruments.

You do this by subtracting the bid price from the ask price. For example, if you're trading GBP/USD at 1.3089/1.3091, the spread is calculated as 1.3091 – 1.3089, which is 0.0002 (2 pips). Spreads can either be wide (high) or tight (low) – the more pips derived from the above calculation, the wider the spread.

If a bond's Z-spread increases, and nothing else changes, then the bond's yield also increases, and the price decreases. Conversely, if a bond's Z-spread decreases, this the yield also decreases, and the price increases.

What is the difference between Z-spread and ZV spread? ›

Key Takeaways. The zero-volatility spread of a bond tells the investor the bond's current value plus its cash flows at certain points on the Treasury curve where cash-flow is received. The Z-spread is also called the static spread. The spread is used by analysts and investors to discover discrepancies in a bond's price ...

The G-spread is the yield spread in basis points over an interpolated government bond. The spread is higher for bearing higher credit, liquidity, and other risks relative to the government bond. The I-spread is the yield spread of a specific bond over the standard swap rate in that currency of the same tenor.

Higher spreads indicate a higher default risk in junk bonds and can be a reflection of the overall corporate economy (and therefore credit quality) and/or a broader weakening of macroeconomic conditions.

The 10-2 Treasury Yield Spread is the difference between the 10 year treasury rate and the 2 year treasury rate. A 10-2 treasury spread that approaches 0 signifies a "flattening" yield curve. A negative 10-2 yield spread has historically been viewed as a precursor to a recessionary period.

Measures of spread describe how similar or varied the set of observed values are for a particular variable (data item). Measures of spread include the range, quartiles and the interquartile range, variance and standard deviation.

Introduction. A measure of spread, sometimes also called a measure of dispersion, is used to describe the variability in a sample or population. It is usually used in conjunction with a measure of central tendency, such as the mean or median, to provide an overall description of a set of data.