finance, the yield spread is the difference between the quoted rates of return on two different investments, usually of different credit quality.
It is a compound of yield and
The "yield spread of X over Y" is simply the percentage
return on investmentfrom financial instrumentX minus the percentage ROI from financial instrument Y (per annum).
The yield spread is a way of comparing any two financial products. In simple terms, it is an indication of the
risk premiumfor investing in one investment product over another.
When spreads widen between bonds with different quality ratings it implies that the market is factoring more risk of default on lower grade bonds. For example, if a risk free 10 year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, the spread between Treasuries and junk bonds is 2%. If that spread widens to 4% (increasing the junk bond yield to 9%), the market is forecasting a greater risk of default which implies a slowing economy. A narrowing of spreads (between bonds of different risk ratings) implies that the market is factoring in less risk (due to an expanding economy).
There are several measures of yield spread, including
Z-spreadand option adjusted spread.
In U.S. consumer loans, particularly home
mortgages, a yield spread is the difference between the interest rate actually paid by the borrower on a particular loan and the (lower) interest rate that the borrower's credit would allow that borrower to pay. For example, if a borrower's credit is good enough for a lender to make a loan at 6.0%, but the borrower actually takes out a loan at 6.5%, the 0.5% difference in the interest rates is the yield spread. As the lender earns additional interest on the loan without assuming additional risk (the borrower's credit is the same), this is a source of additional profit for the lender. In order to encourage loan brokers to find borrowers who will pay yield spreads, lenders typically offer yield spread premiums to the brokers who bring them loans with yield spreads.
Yield spread premium
Yield curve spread
Credit spread (bond)
Option adjusted spread
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yield spread — The difference in yield between different security issues usually securities of different credit quality. Bloomberg Financial Dictionary * * * yield spread yield spread ➔ spread2 * * * yield spread UK US noun [C] ► ( … Financial and business terms
Yield Spread — The difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can… … Investment dictionary
Yield spread premium — The yield spread premium (YSP) is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate that the borrower qualifies for. For example, If a mortgage broker offers a borrower a loan of $100,000 at… … Wikipedia
Yield Spread Premium — A form of compensation that a mortgage broker, acting as the intermediary, receives from the original lender for selling an interest rate to a borrower that is above the lender s par rate for which the borrower qualifies. The yield spread premium … Investment dictionary
Yield spread strategies — Strategies that involve positioning a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market. The New York Times Financial Glossary … Financial and business terms
yield spread strategies — Investments that position a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market. Bloomberg Financial Dictionary … Financial and business terms
Relative yield spread — The ratio of the yield spread to the yield level. The New York Times Financial Glossary … Financial and business terms
relative yield spread — The ratio of the yield spread to the yield level. Used for bonds. Bloomberg Financial Dictionary … Financial and business terms
Nominal Yield Spread — The spread, expressed in percent or basis points, that when added to the yield at one point on the Treasury yield curve equals the discount factor that will make a security s cash flows equal to its current market price. Nominal yield spreads are … Investment dictionary
Yield curve spread — on a simple mortgage backed security (MBS) is the flat spread over the treasury yield curve required in discounting a pre determined coupon schedule to arrive at its present market price.That is, the MBS yield curve spread is based on a… … Wikipedia