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CFA® Level I · Fixed Income · free lesson
Yield and Yield Spread Measures for Fixed-Rate Bonds
Bond yields are only comparable when they are measured the same way. This module shows how to restate yields across compounding periodicities, how to calculate and use the main yield measures for fixed-rate bonds, including yield-to-call and yield-to-worst for callable bonds, and how to separate a bond's yield into a benchmark rate and a spread using benchmark, G-, I-, Z- and option-adjusted spreads.
What you will learn
1. Convert a bond yield from one compounding periodicity to another, calculate an effective annual yield, and explain street-convention, true and government-equivalent yields.
- Quoted yields carry a periodicity: semiannual bond basis for Treasuries and gilts, annual for Bunds and Eurobonds.
- Conversion: (1 + APR_m / m)^m = (1 + APR_n / n)^n; periodicity 1 gives the effective annual yield.
- More frequent compounding means a lower stated rate for the same effective yield.
- True yield uses actual payment dates and is never above the street convention yield.
- Government equivalent yield restates a 30/360 yield on an actual/actual basis.
2. Calculate and interpret yield measures for fixed-rate bonds, including current yield, simple yield, yield-to-call, yield-to-worst and option-adjusted yield.
- Current yield = annual coupon / flat price; it ignores gains or losses to maturity.
- Simple yield = (coupon +/- straight-line amortization of discount or premium) / flat price.
- Yield-to-call uses the call date and call price as the redemption; one YTC per call date.
- Yield-to-worst = lowest of the YTM and all YTCs; a conservative quote for callable bonds.
- Option-adjusted yield uses flat price + call value; for callable bonds OAY < YTM.
3. Calculate and interpret yield spreads for fixed-rate bonds, including the benchmark spread, G-spread, I-spread, Z-spread and option-adjusted spread.
- Yield = benchmark (macro factors) + spread (credit, liquidity, tax, options).
- Benchmark spread: over on-the-run government bond; G-spread: over interpolated government yield.
- I-spread: over the swap rate of the same maturity.
- Z-spread: constant spread over every government spot rate that reprices the bond.
- OAS = Z-spread - option value in bp; for callable bonds OAS < Z-spread.
Module at a glance
- Restate yields on the same periodicity before comparing: (1 + APR_m/m)^m = (1 + APR_n/n)^n.
- More frequent compounding means a lower stated rate for the same effective yield.
- Current yield ignores gains or losses to maturity; simple yield amortizes them straight-line.
- For callable bonds, compute every yield-to-call; yield-to-worst is the lowest of these and the YTM.
- Option-adjusted yield adds the call value to the price; for callable bonds OAY < YTM.
- Benchmark spread, G-spread and I-spread compare single yields; the Z-spread uses the whole spot curve.
- OAS = Z-spread - option value; spreads isolate credit and liquidity compensation.
This free module has 3 lessons, 14 practice questions with full explanations.