For coupon payments, look for the coupon rate. This information is generally provided with bond quotes. [1] X Research source
For example, a bond that pays coupon payments of 5. 5 percent per year would have a nominal yield of 5. 5 percent. [2] X Research source
For example, a bond with a $1,000 par value that pays a 5. 5 percent coupon payment annually would pay $55 per year. If the bond is currently trading at $970, the current yield is about 5. 67 percent.
Yield spread can also be calculated between other debt securities, such as certificates of deposit. [4] X Research source For example, if one bond has a yield of 5 percent and another has a yield of 4 percent, the spread is 1 percent. Bonds might have different yields for a number of reasons, including their term (the length of their life), quality (bonds viewed as riskier may pay higher interest rates), and other qualities.
For example, if the two bonds mentioned earlier in this step (with the coupon spread of 2 percent) only had a bond spread of 1 percent, you could conclude that there are other factors reducing the value of the bond that pays 7 percent. [5] X Research source
Basis points are abbreviated as “BP” or “bps” and may be referred to verbally as “beeps. “[7] X Research source
For example, if a bond has a yield of 5. 5 percent and a Treasury note with the same maturity has a yield of 2. 7 percent, the credit spread is 2. 8 percent, or 280 basis points.
The bond spread between two different bonds can change over time for a number of reasons. Try to determine a trend, and then the reason for the increase decrease. Yields change as the market interest rate changes (the two move inversely to each other), while coupon remains the same. Two bonds of same quality should have similar yields.
Determine the credit spread for a bond you are considering investing in. The size of the spread will help you get an idea of the risk that the market believes the bond carries. Bond rating agencies, like Moody’s, Standard and Poor’s, and Fitch rate bond issuers according to their credit risk. Bonds are rated from AAA to C (or a similar scale, depending on the rating agency), which represents the scale from safe, investment-grade bonds to risky, “junk” bonds. [11] X Research source Yields offered by bonds are inverse to their credit rating. For example, a AAA-rated issuer may only need to offer 6 percent, whereas a B-rated issuer might need to offer 9 percent for a bond with the same terms. [12] X Research source
For example, as investor confidence falls, they seek more security by selling B-rated bonds and investing in AAA-rated ones. This causes the price of the poor quality bonds to fall, increasing their yields. The higher quality bonds will simultaneously increase in price due to demand, while reducing their yield. This can be further divided into analyses of different industries, sectors, or bond markets. If the bond spreads are increasing (widening) for one of them, this means that the industry is outperforming others. [14] X Research source
