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Summary: Spread is an often overlooked concept, yet it is one of the most powerful tools in fixed - income portfolio management and trading. As
Summary: Spread is an often overlooked concept, yet it is one of the most powerful tools in fixedincome portfolio management and trading. As an institutional bond manager and trader, we rarely quoted corporate debt by its price; it was mostly quoted by its spread. The spread is the difference between the yield on the underlying reference Treasury bond the ontherun treasury or OTR and the corporate bond of similar maturities. For instance, the year OTR is trading at a yield of and an IBM year corporate bond is trading at a spread of Then, the yield of the IBM year would be We use spread to gauge risk and relative value. The higher the spread to its reference Treaury, the more perceived risk. The lower the spread to its average, the lower the perceived relative value.
Classroom Application: Part of being a prudent financial manager is recognizing opportune times to deploy capital or issue debt. This article highlights many of the difficult choices and factors that CFOs face. Their choices are important to the overall management of their balance sheets and the future growth of the company.
Questions:
According to the current average spreads in the market, as a CFO, why would it be advantageous to issue debt right now? Explain
How will the increased supply of corporate debt likely affect the yields of secondary corporates? Explain.
If Treasury yields begin to rise due to increased deficit spending, what is likely to happen to corporate spreads if demand stays static?
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