Yield spread

Bonds range in quality from government bonds (least likely to default) to corporate debt to junk bonds (most likely to default). The riskier the bond’s issuer, the greater the yield investors can expect. The yield is the interest paid by the bond’s issuer until it matures, calculated as a percentage of its face value.

Bonds that are not government securities are evaluated by the market on the basis of the difference between their yield and the yield of a comparable government bond. That difference is called a spread. If a ten-year corporate bond is trading at a yield of 7% and the ten-year US Treasury note is trading at a yield of 5%., the corporate bond is said to offer a 200 basis point spread (100 basis points equal 1%).

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