Spreads

Question 1

G-Spread

Answer 1

Credit-Risky Bond Yield − Gov’t Spot Rate

Reference Curve: Government spot curve

Measures credit risk over a risk-free rate

Question 2

I-Spread

Answer 2

Credit-Risky Bond Yield − Swap Rate

Reference Curve: Swap curve (interpolated)

Measures credit risk vs interbank funding costs

Question 3

Swap Spread

Answer 3

Swap Rate − Gov’t Spot Rate

Reference Curve: Government spot curve

Measures liquidity/funding premium in swap market

Question 4

Z-Spread

Answer 4

Spread added to each spot rate to price the bond

Reference curve: Entire spot curve (zero curve)

Measures total compensation for credit + liquidity risk (used in pricing)

Question 5

TED Spread

Answer 5

3-Mo LIBOR − 3-Mo Treasury Bill Rate

Reference Curve: T-Bill (risk-free)

Measures short-term credit risk between banks and gov securities

Question 6

LIBOR-OIS (MRR)

Answer 6

LIBOR − Overnight Indexed Swap Rate (OIS / MRR)

Reference Curve: OIS Rate

Measures interbank credit risk and stress in funding markets