Nominal spread of a non-treasury bond can be defined as the difference between the bond's yield and the yield to maturity of a benchmark treasury coupon security. For example, let us consider a 10-year bond. Assume that the yield to maturity of the Treasury bond is 7% and that of the non-treasury bond is 8.5%. Then, the normal spread would be 150 basis points (8.5% - 7%).

The two main drawbacks of this Spread are:

• The term structure of the spot rates  are not considered in both the bonds.

• In case of callable and/or putable bonds, the cash flows of the non-treasury bonds may be altered due to the expected interest rate volatility.

Posted Date: 9/10/2012 2:39:01 AM | Location : United States

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