Yield spread

The yield spread is the difference between the yield on a bond and the yield on a similar risk free debt instrument. It is the amount by which the yield on a bond exceeds the risk free rate for the same cash flows.

This means that the yield spread represents the risk premium a particular instrument pays.

It therefore reflects the credit risk taken.

Yield spreads can also sometimes usefully be calculated for a sector, or between a particular bond and a basket of other bonds such as its sector.

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