What does duration times spread tell you?

Duration Times Spread (DTS) is the market standard method for measuring the credit volatility of a corporate bond. The result is a single number that can be used to compare credit risk across a wide range of bonds.

What does the spread on a bond mean?

The bond spread or yield spread, refers to the difference in the yield on two different bonds or two classes of bonds. Investors use the spread as in indication of the relative pricing or valuation of a bond. The wider the spread between two bonds, or two classes of bonds, the greater the valuation differential.

What does high bond spread mean?

A high-yield bond spread, also known as a credit spread, is the difference in the yield on high-yield bonds and a benchmark bond measure, such as investment-grade or Treasury bonds. High-yield bonds offer higher yields due to default risk. The higher the default risk the higher the interest paid on these bonds.

How do you calculate spread duration?

You can find bond spread duration formulas in advanced economics texts and on the web. where P = bond price, C = semiannual coupon interest (in dollars), y = one-half the yield to maturity and n = number of semiannual periods and M equals value at maturity.

What is spread risk of bonds?

Spread risk refers to the danger that the interest rate on a loan or bond turns out to be too low relative to an investment with a lower default risk for it to be a good use of funds.

What does it mean when bond spreads tighten?

The direction of the yield spread can increase, or “widen,” which means that the yield difference between two bonds or sectors is increasing. When spreads narrow, it means the yield difference is decreasing.

Why is spread duration important?

The more volatile the price, the less certain an investor can be about avoiding losses while earning the bond’s coupon,1 or interest rate. Lastly, a bond’s “spread duration” measures the sensitivity of its price to changes in the spread paid for the additional credit risk the bond contains.

What are spread risks?

Spread risk is risk (usually market risk or earnings risk) due to exposure to some spread. It often arises with a long-short position or with derivatives. A synonym for spread risk is basis risk. See the article Interest Rate Risk for more on basis risk in fixed income markets.

Is spread tightening good or bad?

Lower quality bonds, with a higher chance of the issuer defaulting, need to offer higher rates to attract investors to the riskier investment. The widening is reflective of investor concern. This is why credit spreads are often a good barometer of economic health – widening (bad) and narrowing (good).