yield spread
The difference in yield between two different bonds or debt instruments, often used to measure credit risk or economic expectations.
Example
“The widening yield spread between junk bonds and Treasuries signaled rising investor concern about credit risk.”
Memory Tip
YIELD SPREAD = the gap between two yields. Wider spread = more risk perceived.
Why It Matters
Yield spread helps investors understand the extra compensation they receive for taking on additional risk when choosing between different bonds. If you are comparing investment options, a wider spread signals that one bond carries more risk, which can affect your overall portfolio returns and whether the extra yield justifies that risk.
Common Misconception
Many people believe that a higher yield spread always means a better investment opportunity. In reality, a wider spread often indicates greater risk or economic uncertainty, so the higher yield is compensation for that risk rather than a sign of superior value.
In Practice
Suppose a government bond yields 3 percent while a corporate bond from the same maturity yields 5 percent, creating a 2 percent yield spread. This 2 percent difference exists because investors demand extra compensation for the higher default risk of the corporation compared to the government, which is considered safer.
Etymology
YIELD (return) SPREAD (gap, difference). The SPREAD (gap) between two YIELDS.
Common Misspellings
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