Price Yield Spread Specification

Definition

Price Yield Spread Specification. The specification of a price in terms of the difference between the yield that an investor requires for an investment and the published yield on some reference instrument at that same point in time, such as a Treasury Note.

In Debt pricing, Spreads are used because it's easier to quote things in a stable way, and it reflects the relative value of the thing. This is a spread of yields between the instrument so priced and the reference instrument. This spread is the mechanism by which the price is determined in yield terms, as the annualised interest rate that a investor requires for an investment. A yield is expressed as the annualised interest Rate that a investor requires for an investment. In the case of a loan the terms are set up so that the interest rate (coupon) equals that required yield and therefore the present value is equal to the loan principal. For a security, however the coupon rate is already determined so the required yield is applied to the projected cash flows in order to calculate a present value ( the price an investor is prepared to pay for the specified cash flows) Typically the required yield for a debt security is the yield to maturity. Note that this may be a discount or premium. Using the Spread lets you calculat e a yield from another observed yield as follows: Yield 1 = risk free yield Spread is to Yield 2 which is the instrument you are pricing. Earlier notes from Strucured finance review of prices quoted in relative terms: The price quoted in reference to an index e.g. LIBOR+50bp i.e. the yield. (the rate which is currently LIBOR)+50 is the price, and 50bp is the spread. e.g. Price:101% Yield = Benchmark + spread Price of 101% can be expressed as LIBOR+50 or Treasury+20 so these are separate ways of expressing the same thing. The one thing which is the price is expressed in these different ways. note also that unlike equities there's not a range of different price results from this. Spread = analytic. Bond has Price + yield. then compared to today's 90 day treasury value it's Spread is X, compared with (1 month) LIBOR its spread is Y and so on. Notes origin:NAB and SMER

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