About Me
Chartered Financial Analyst (CFA)
1 Ethical and Professional Standards
1-1 Code of Ethics
1-2 Standards of Professional Conduct
1-3 Guidance for Standards I-VII
1-4 Introduction to the Global Investment Performance Standards (GIPS)
1-5 Application of the Code and Standards
2 Quantitative Methods
2-1 Time Value of Money
2-2 Discounted Cash Flow Applications
2-3 Statistical Concepts and Market Returns
2-4 Probability Concepts
2-5 Common Probability Distributions
2-6 Sampling and Estimation
2-7 Hypothesis Testing
2-8 Technical Analysis
3 Economics
3-1 Topics in Demand and Supply Analysis
3-2 The Firm and Market Structures
3-3 Aggregate Output, Prices, and Economic Growth
3-4 Understanding Business Cycles
3-5 Monetary and Fiscal Policy
3-6 International Trade and Capital Flows
3-7 Currency Exchange Rates
4 Financial Statement Analysis
4-1 Financial Reporting Mechanism
4-2 Income Statements, Balance Sheets, and Cash Flow Statements
4-3 Financial Reporting Standards
4-4 Analysis of Financial Statements
4-5 Inventories
4-6 Long-Lived Assets
4-7 Income Taxes
4-8 Non-Current (Long-term) Liabilities
4-9 Financial Reporting Quality
4-10 Financial Analysis Techniques
4-11 Evaluating Financial Reporting Quality
5 Corporate Finance
5-1 Capital Budgeting
5-2 Cost of Capital
5-3 Measures of Leverage
5-4 Dividends and Share Repurchases
5-5 Corporate Governance and ESG Considerations
6 Equity Investments
6-1 Market Organization and Structure
6-2 Security Market Indices
6-3 Overview of Equity Securities
6-4 Industry and Company Analysis
6-5 Equity Valuation: Concepts and Basic Tools
6-6 Equity Valuation: Applications and Processes
7 Fixed Income
7-1 Fixed-Income Securities: Defining Elements
7-2 Fixed-Income Markets: Issuance, Trading, and Funding
7-3 Introduction to the Valuation of Fixed-Income Securities
7-4 Understanding Yield Spreads
7-5 Fundamentals of Credit Analysis
8 Derivatives
8-1 Derivative Markets and Instruments
8-2 Pricing and Valuation of Forward Commitments
8-3 Valuation of Contingent Claims
9 Alternative Investments
9-1 Alternative Investments Overview
9-2 Risk Management Applications of Alternative Investments
9-3 Private Equity Investments
9-4 Real Estate Investments
9-5 Commodities
9-6 Infrastructure Investments
9-7 Hedge Funds
10 Portfolio Management and Wealth Planning
10-1 Portfolio Management: An Overview
10-2 Investment Policy Statement (IPS)
10-3 Asset Allocation
10-4 Basics of Portfolio Planning and Construction
10-5 Risk Management in the Portfolio Context
10-6 Monitoring and Rebalancing
10-7 Global Investment Performance Standards (GIPS)
10-8 Introduction to the Wealth Management Process
7.4 Understanding Yield Spreads Explained

7.4 Understanding Yield Spreads - 7.4 Understanding Yield Spreads

Key Concepts

Yield Spread

A Yield Spread is the difference in yields between two different securities with similar maturities. It is often used to compare the returns of different types of bonds, such as government bonds and corporate bonds. A higher yield spread typically indicates higher perceived risk.

Example: If a 10-year U.S. Treasury bond yields 2.5% and a 10-year corporate bond yields 4.5%, the yield spread is 2.0%. This spread reflects the additional risk investors demand for holding the corporate bond over the Treasury bond.

Credit Spread

A Credit Spread is a type of yield spread that reflects the difference in yields between a corporate bond and a government bond of the same maturity. It is primarily influenced by the creditworthiness of the issuer. A wider credit spread indicates higher perceived credit risk.

Example: A high-yield corporate bond with a 5-year maturity yields 6.0%, while a 5-year U.S. Treasury bond yields 1.5%. The credit spread is 4.5%, reflecting the higher risk associated with the corporate bond.

Option-Adjusted Spread (OAS)

The Option-Adjusted Spread (OAS) is a measure used to value bonds with embedded options, such as callable or putable bonds. It adjusts the yield spread to account for the value of the embedded option, providing a more accurate measure of the bond's risk and return.

Example: A callable bond has a yield of 4.0%, and the OAS is 2.5%. This means that after accounting for the value of the embedded call option, the bond's spread over the risk-free rate is 2.5%. This adjusted spread helps investors compare the bond to other fixed-income securities.

Z-Spread

The Z-Spread, or Zero-Volatility Spread, is the constant spread that, when added to the yield of a Treasury bond, makes the present value of the bond's cash flows equal to its market price. It assumes that the bond's cash flows are unaffected by interest rate volatility.

Example: A corporate bond with a market price of $950 and a yield of 5.0% has a Z-Spread of 2.0%. This means that when a 2.0% spread is added to the yield of a Treasury bond with the same maturity, the present value of the corporate bond's cash flows equals $950.

Yield Curve Spreads

Yield Curve Spreads refer to the differences in yields between bonds of different maturities within the same issuer's debt. These spreads help investors understand the term structure of interest rates and the relative value of bonds with different maturities.

Example: The yield on a 2-year U.S. Treasury bond is 1.0%, while the yield on a 10-year U.S. Treasury bond is 2.5%. The yield curve spread between these two bonds is 1.5%, indicating that investors demand a higher yield for the longer-term bond.

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