A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from anotherA yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings and risk, calculated by deducting the yield of one instrument from another For corporate bonds amout of compensation expected is proportional to the risk. It depends upon following two factors
*) Maturity. Longer maturity, higher risk
*) Credit risk, probability default( PD), Loss given Degault( LGD)
Generally the calculation is done betweeen relevant bonds and references
*) Yield of govt bond with similar maturity and similar currency
*) Theoratical govt dont curve( If no accurate match exists)
*) Yield of and IR Swap of the same period
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