Yield and Yield Spread Measures for Fixed-Rate Bonds

How to state a bond's yield on a comparable basis (periodicity, effective annual rates and market conventions), how to measure the yield of a callable bond (yield-to-call, yield-to-worst, option-adjusted yield), and how to split a yield into a benchmark rate and a spread: benchmark spread, G-spread, I-spread, Z-spread and OAS.

1. 1. Periodicity and converting annual yieldsA quoted annual yield means nothing until you know how many times a year it compounds, so convert yields to the same periodicity before you compare them.Video · 7 minFree14 min
2. 2. Current yield and other yield conventionsBeyond the YTM, the market quotes several simpler or convention-adjusted yields, and you must know what each one ignores before comparing bonds.13 min
3. 3. Callable bonds: yield-to-call, yield-to-worst and option-adjusted yieldA callable bond may not live to maturity, so investors compute a yield to every possible call date and take the lowest one, or value the call option and strip it out.Video · 7 min14 min
4. 4. Benchmark rates, yield spreads and the G-spreadA bond's yield is a benchmark rate that moves with the whole market plus a spread that reflects the issuer and the bond itself; the G-spread measures that spread over government bonds.13 min
5. 5. I-spread, Z-spread and option-adjusted spreadThe I-spread measures a bond's yield over the swap rate, the Z-spread is a constant spread added to every spot rate, and the OAS takes the value of an embedded call out of the Z-spread.Video · 6 min14 min
6. 6. Integrated cases: G-spreads from prices, Z-spreads from curvesSpread cases hide their difficulty in the first step: a G-spread needs two yields that you must first extract from two prices, and a Z-spread needs every cash flow discounted at its own spot rate plus one constant.16 min