03 Credit Sights Yields and Spreads

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16 Terms

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Yield

Earnings on an investment over time, expressed as a percentage

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Yield to Maturity (YTM)

Return if bond is held to maturity and repaid at par

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Yield to Call (YTC)

Return if bond is held until a specific call date and called at a stated price.

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Yield to Worst (YTW)

Lowest possible yield assuming the bond is called at the worst possible time for the investor.

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Callable bonds

Allow issuers to repurchase the bond early at a stated price and date

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Callable structure common in high yield bonds

8-year maturity, non-callable for first 3 years (8 NC 3).

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American Airlines bond callable on Nov 15, 2025 at 104.25; callable at par starting Nov 15, 2027.

Callable bond example

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  • YTM (May 15, 2029): ~7.84%

  • YTC (Nov 15, 2025): ~11.86%

  • YTW (Nov 15, 2027): ~7.51% — lowest return scenario

Yield Example Breakdown

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Spread

Difference in yield between a corporate bond and a matched Treasury (credit risk premium).

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Basis points (bps)

1% = 100 bps

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OAS (Option-Adjusted Spread)

  • Adjusts for embedded options (e.g., callability)

  • Useful for comparing callable bonds

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G-Spread (Government Spread):

  • Difference between corporate bond yield and government bond yield with similar maturity

  • Straightforward risk premium measure

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I-Spread (Interpolated Spread):

  • Difference between corporate bond yield and swap rate

  • Reflects credit risk relative to the swap curve, not Treasury

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Z-Spread (Zero Volatility Spread):

  • Constant spread added to each point of the risk-free curve to match bond price

  • Ignores interest rate volatility

  • Best for assessing non-callable bond credit risk

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True or False: Callable bonds are most common in High Yield?

False

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Rank the following yields for a callable bond from highest to lowest based on the provided example:

Yield to Call (Nov 15, 2025): 11.86%

Yield to Maturity (May 15, 2029): 7.84%

Yield to Worst (Nov 15, 2027): 7.51% 

  1. Yield to Maturity (May 15, 2029): 7.84%

  2. Yield to Worst (Nov 15, 2027): 7.51% 

  3. Yield to Call (Nov 15, 2025): 11.86%