Reading 53: Yield and Yield Spread Measures for Fixed-Rate Bonds

Book 3: Fixed Income

Periodicity

the number of bond coupon payments per year

Street Convention

bond yield calculated using the stated coupon payment dates

True Yield

yield calculated using actual coupon payment dates

What happens when a coupon payment falls on a weekend or holiday?

the payment happens the next business day

Current Yield

looks at the bond’s annual interest income relative to the market price

Simple Yield

takes a discount or premium into account by assuming that any discount or premium declines evenly over the remaining years to maturity

Yield to Worst

the lowest of YTM and the various yields to call

A callable bond can be viewed as an equivalent…

straight bond combined with a short call option position

Option-Adjusted Price

the value of an equivalent straight bond

Option-Adjusted Yield

the yield that the bond would be offering if it were not callable

Straight Bond Value =

callable bond + call option value

Yield Spread/Benchmark Spread

the difference between the yields of a bond and a benchmarked security

G-Spread

a yield spread in basis points over a government’s bond

I-Spreads

uses interest rate swaps in the same currency and with the same tenor as the bond

What does an I-Spread represent?

the extra return of a bond in excess of the interbank market reference rate used in swap contracts

Where are I-Spreads used most frequently?

bonds denominated in euros

Spot Rate

yields earned by individual cash flows at different maturities

In terms of the Spot Rate, what does the YTM represent?

represents a weighted average of the different spot rates offered by individual cash flows of the bond

Zero-Volatility Spread

yield spread that would need to be added to the entire risk-free spot rate curve to make the PV of a bond’s cash flows equal to its current market price

Options Adjusted Spread (OAS)

the spread to the government spot rate curve that the bond would have if it were option free

OAS =

z spread + call option value