Quality Spread Differential - QSD

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DEFINITION of 'Quality Spread Differential - QSD'

In an interest rate swap, the difference between the interest rates of debt obligations offered by two parties of different creditworthiness that engage in the swap. A swap transaction is considered beneficial to both parties only when the QSD is positive.

BREAKING DOWN 'Quality Spread Differential - QSD'

For example, suppose ABC Corp can borrow debt at a fixed rate of 10.75% or at a floating rate of LIBOR. And let's say that XYZ Corp. can borrow debt at a fixed rate of 10% or at a floating rate of LIBOR -0.25%. The fixed rate differential would be 0.75% and the floating rate differential would be 0.25%. The QSD would be 0.5%.

Since the QSD is positive, both companies would benefit from entering into a swap transaction.

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