Yield Spread

Yield Spread

Usually, debt instruments with different characteristics (maturity date/credit rating or risk) have different yields. Let’s take bond yields as an example and analyze the risks related to them. The bond yield is the return rate, which holders of bonds get if they have this bond until maturity and receive the cash flows at the promised dates. The risks include a credit risk, an interest rate risk, an inflation risk, etc.

We can divide the measures of yield spread into the nominal spread (G-spread), interpolated spread (I-spread), zero-volatility spread (Z-spread) and option-adjusted spread (OAS).

G-spread

Nominal spread (G-spread) represents the difference between Treasury bond yields and corporate bond yield with the same maturity. Treasury bonds have zero default risk, that is why the difference between corporate and Treasury bonds show the default risk. We can calculate the G-spread by using the following formula:

G-Spread = corporate bond’s yield – government bond’s yield

I-spread 

Interpolated spread (I-spread) is the difference between a bond's yield and the swap rate. We can use LIBOR as an example. It shows the difference between a bond's yield and a benchmark curve. If the I-spread increases, the credit risk also rises. I-spread is usually lower than the G-spread. 

Z-spread 

This type of spread is also known as a zero-volatility spread. It is the spread that is added to each spot interest rate to cause the present value of the bond cash flows to equal bond’s price. 

Option-adjusted spread

The option-adjusted spread is calculated as zero-volatility spread minus the call option’s value. There is a term “spread” in the Forex market, too. It is referred to the commission you pay a broker. The Forex spread is calculated as a difference between the bid and ask prices.

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2022-04-11 • Updated

Frequently asked questions

  • What is a spread in stock trading?

    A spread for a stock is the difference between the highest price that a buyer is willing to pay (the bid) and the lowest price that a seller is willing to accept (the ask). For example, the bid/ask rate for Tesla stock is $673,30/$673,58. You will buy the stock at the higher ask price of $673,58 and sell it at the lower bid price of $673,30. This represents a spread of 0,28 points. FBS provides competitive spreads on the stock market.

  • How does spread work in crypto?

    The spread is the difference between the bid price and the ask price. A bid is a buy order, where you sell the base currency, and an ask is a sell order, where you buy the base currency. Base currency is the first currency in the pair.

    The spread is one of the key costs in trading, including cryptocurrency trading. FBS broker offers competitive crypto spreads and fast order execution for convenient crypto trading. So if you are looking for a cryptocurrency broker, consider trying FBS.

  • What are the exotic pairs with the best spread at FBS?

    The spread is the difference between the bid price and the ask price. A bid is a buy order, where you sell the base currency, and an ask is a sell order, where you buy the base currency. Base currency is the first currency in the pair.

    FBS broker offers competitive spreads for exotic Forex. To make sure, you can check USDZAR, USDMXN, and USDTRY and have a look at the spreads. You can choose your exotic Forex pairs and start trading with FBS.

  • What determines a spread in Forex trading?

    A spread can be narrower or wider depending on a currency pair, Forex trading hours, and market conditions. At FBS, you can choose trading instruments with spreads most suitable for your needs: a floating spread from 0.5 points, fixed spread from 3 points, and zero spread.

  • What causes a high spread in Forex?

    Spreads usually widen with the increase in volatility or low liquidity caused by out-of-hours trading. FBS offers a competitive spread list with a floating spread from 0.5 points, fixed spread from 3 points, and zero spread. Start trading Forex on favorable terms now.

  • How to reduce a spread in Forex trading?

    A spread usually indicates a level of volatility. The more volatile the Forex market, the wider the spread gets, especially when a news release affects currencies. However, the most promising trades happen during higher volatility.

    At FBS, you can open trading accounts with a floating spread, fixed spread, and zero spread. Choose a currency pair most appropriate for your trading strategy and make the most of volatility.

  • Which Forex currency pair has the lowest spread?

    Generally, the EURUSD pair has the lowest spread. At FBS, you can trade EURUSD starting from 0 pips with an ECN account.

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