What is a bond spread?

A bond spread is the difference between the yields of two bonds with different credit ratings.  The differing ratings are usually because of different levels of risk involved with the bonds.  Mathematically, you can calculate the spread by subtracting the interest rate of one bond from the interest rate of the other.  For example, if the current yield on a bond that Microsoft is offering is 6.1% and a federal bond has a current yield of 5.9%, the two bonds would have a .2% spread.

So, how can you use this information as an investor?  If you look at the spread over time, you should be able to find abnormalities in the spread.  These abnormalities could be buying or selling opportunities.

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