measuring yield spreads, Financial Management

Assignment Help:

A yield spread between any two bond issues can be easily computed when the maturity date for both these issues is same.

The yield spread between these two bond issues, say bond A and bond B, is calculated as follows:

         Yield Spread = Yield on bond A - Yield on bond B

Here, bond B is considered to be a benchmark against which bond A is measured.

When a yield spread is calculated by applying the above formula, it is referred to as an absolute yield spread. It is measured in basis points. For example, on the basis of Table 1, as on 03.07.2007, the yield on a 5-year on-the-run treasury issue was 4.87% and the yield on a single A-rated 5-year industrial bond was 7%. If bond A is the 10-year industrial bond and bond B is the 10-year on-the-run treasury issue, the absolute yield spread is:

         Yield Spread = 7% - 4.87% = 2.13% or 213 basis points.

Unless otherwise specified, yield spreads are measured by applying the
above-mentioned formula. Yield spread may also be computed on a relative basis by taking the ratio of the yield spread to the yield of the reference bond. This is called a relative yield spread.

        1345_measuring yield spread.png   

 

Sometimes, bonds are compared in terms of a yield ratio, the quotient of two bond yields, as shown below: 

        1264_measuring yield spread1.png   

 

 Let us assume that Bond B is the benchmark Treasury issue; then the equations for the yield spread measures are as follows:  

       Absolute yield spread  = Yield on bond A - Yield of on-the run treasury 

       Relative yield spread =   1209_measuring yield spread2.png   

     Yield Ratio                =  1560_measuring yield spread3.png   

 

Considering the above example, let us compare the yields on the 5-year single A-rated industrial bond and the 5-year on-the-run treasury; the relative yield spread and yield ratio are computed below:  

       Absolute yield spread = 7% - 4.87% = 2.13% = 213 basis points 

       610_measuring yield spread4.png


Related Discussions:- measuring yield spreads

Accounting to budget, Accounting to Budget: Accounting to budget is a c...

Accounting to Budget: Accounting to budget is a commonly used term to describe how an organisation controls its accounting process. Typically, an organisation divides its re

What number of seats generates that maximum revenue, Q. In planning a resta...

Q. In planning a restaurant, it is estimated that a revenue of $6 per seat will be realized if the number of seats is at most 50. On the other hand, the revenue on each seat will d

Case study - volatility trading, Case Study: Volatility Trading (a) The...

Case Study: Volatility Trading (a) The understanding in this case study deal with Convertible as well as Reverse-Convertible bonds. These are interesting instruments by themsel

Define financial management, Financial management is that division of manag...

Financial management is that division of managerial process which is concerned with the planning and controlling of firm's financial resources. It is concerned with the procurement

Advanced Accounting, Balance Sheets Peony Ltd. Aster Ltd. ...

Balance Sheets Peony Ltd. Aster Ltd. Assets: Cash $ 62,500 $ 25,000 Accounts receivable 187,500 200,000 Inventori

Which formula would you use to solve for the payment, Which formula would y...

Which formula would you use to solve for the payment required for a car loan if you know the interest rate, length of the loan, and the borrowed amount?  Explain. To answer for

Tax-backed debt, An analyst should first examine the issuers ...

An analyst should first examine the issuers debt structure in order to analyze the tax-backed debts. The debt burden consists of respective direct a

Evaluate the vulnerability, Assume you are a professional financial analyst...

Assume you are a professional financial analyst working for a wealthy investor.  Your client has $2.6 million to invest and wants to sink it into a single stock (diversification is

Cash discount, Which one is true 1.the higher the discount rate the lower ...

Which one is true 1.the higher the discount rate the lower the cost of trade credit 2.the higher the discount rate the higher the cost of trade credit 3.cost of trade credit duri

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd