Lesson 8 of 8 · All lessons in this module
- Credit risk and where it comes from
- Expected loss: POD × LGDVideo lesson
- What drives default risk and recovery
- Credit ratings: uses and limits
- Why spreads move: macro and issuer factors
- Inside the spread: credit and liquidity
- How spread changes move bond pricesVideo lesson
- Integrated cases: reading a corporate quote
Lesson 8 of 8 · 16 min
Integrated cases: reading a corporate quote
One quote sheet answers three questions in order: what yield spread does the bond pay, how much of it is liquidity rather than credit, and how far could the spread widen before the price falls by a given amount.
In short
- Solve three yields from the bid, mid and offer prices with the same coupon and N, and double each periodic rate for a semiannual bond.
- Yield spread = mid yield − benchmark yield. Liquidity spread = bid yield − offer yield (the lower bid price gives the higher yield). Credit spread = yield spread − liquidity spread.
- Everything is in basis points at the end: a yield difference of 0.126% is 12.6 bp.
- To solve backwards for a spread change, set equal to the price change. Duration alone gives a first answer; convexity corrects it upward.
- Sign check: a price fall means the spread widened (Δs > 0). Use scaled convexity (about duration²) and decimals for Δs.
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