Yield Spread

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DEFINITION of '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 be measured between debt instruments of differing maturities, credit ratings and risk.

BREAKING DOWN 'Yield Spread'

Looking at the yield spread, often with historical spreads, can give investors ideas for potential investment opportunities.

For example, if the five-year Treasury bond is at 5% and the 30-year Treasury bond is at 6%, the yield spread between the two debt instruments is 1% (6% - 5%). If the yield spread has historically been closer to 5%, the investor is much more likely to invest in the five-year bond compared to the 30-year bond (as it should be trading around 1% instead of 6%).

In other words, if the 30-year bond is trading at 6%, then based on the historical yield spread, the five-year should be trading at around 1%, making it very attractive at its current yield of 5%.

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RELATED FAQS
  1. How safe are high yield bonds?

    High-yield bonds, also commonly known as junk bonds, have lower credit ratings than investment grade corporate bonds as well ... Read Full Answer >>
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    The risk-free rate for bonds is used for pricing the yield spread as the difference between the interest rate on a bond and ... Read Full Answer >>
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    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  4. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
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