Lesson 4 of 6 · All lessons in this module
- Periodicity and converting annual yieldsVideo lesson
- Current yield and other yield conventions
- Callable bonds: yield-to-call, yield-to-worst and option-adjusted yieldVideo lesson
- Benchmark rates, yield spreads and the G-spread
- I-spread, Z-spread and option-adjusted spreadVideo lesson
- Integrated cases: G-spreads from prices, Z-spreads from curves
Lesson 4 of 6 · 13 min
Benchmark rates, yield spreads and the G-spread
A 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.
In short
- YTM = benchmark rate + spread. Benchmark = top-down (macro) factors; spread = bottom-up (issuer-specific) factors.
- Benchmark: expected real rate + expected inflation. Spread: credit risk, liquidity, taxation.
- The usual benchmark is the on-the-run government bond: most recently issued, most liquid, priced near par, slightly lower yield than off-the-run bonds.
- Benchmark spread = YTM − yield of a specific benchmark bond.
- G-spread = YTM − actual or interpolated government yield of the same maturity.
- Spreads let you judge relative value by comparing a bond with its own history and with peers.
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