Benchmark spread

Adams and Schoenherr [29] achieved most of these benchmarks by formulating an adhesive consisting of a 40 wt % solids solution of kraft lignin in phenol-methanal-sodium hydroxide. This fluid had a viscosity of 10 Pa/s and thus was a very thick and energy-consuming adhesive to spread. However, when this binder was used in the manufacture of three ply panels of Douglas... 

On the lighter side, the magnitude of the newton is about the weight of an apple. If we were to grind up that apple and spread it out over one square meter, we would have a pressure nf one pascal, which may give a better feeling for the small size of that particular unit. Your Chairman of the Metrication Committee is approximately 2 meters tall, which was not a requirement, but can serve as a benchmark. 

Free allocation based on recent emissions is widely perceived as unfair, as it results in the allocation of more allowances to less carbon-efficient installations and fewer allowances to better-performing installations. As an expression of the recognition of the downside of such an allocation approach Annex in of the Directive makes reference both to benchmarking (in criteria 3 and 7) and to accommodating early action (criterion 7). However, a strong lesson that emerges from the first allocation round is that the attempt to introduce a wide spread around recent or current emission levels at installation level met strong political... 

Also the simple difference between the yield of conventional and inflation-linked bonds or yield spread is an indicator for expected inflation. For example, on 18 September 2014 the 10-year UK 0 1/8% inflation-linked 2024 had a money yield of 2.125% and a real yield of -0.410%, assuming an inflation of 2.571%. Differently, the 10-year benchmark, the UK T A% 2023 had a gross... 

The general rule of corporate bonds is that they are priced at a spread to the government yield curve. In absolute terms, the yield spread is the difference between the yield to maturity of a corporate bond and the benchmark, generally a yield to maturity of a govermnent bond with the same maturity. Corporate bonds include a yield spread on a risk-free rate in order to compensate two main factors, liquidity premium and credit spread. The yield of a corporate bond can be assumed as the sum of parts of the elements as shown in Figure 8.1, in which the yield spread relative to a default-free bond is given by the sum of default premium (credit spread) and liquidity premium. 

The yield of a benchmark government bond depends on expected inflation rate, currency rate, economic growth, monetary and fiscal policy. Conversely, the spread of a corporate bond is influenced by the credit risk of the issuer, taxation and market liquidity. Moreover, the yield spread depends on other factors such as ... 

Z-spread The Z-spread or zero volatility spread calculates the yield spread of a corporate bond by taking a zero-coupon bond curve as benchmark. Conversely to other yield spreads, the Z-spread is constant. In fact, it is found as an iterative procedure, which is the yield spread required to get the equivalence between market price and the present value of all its cash flows. The Z-spread is given by Equation (8.2) ... 

Figure 8.2 shows the Bloomberg YAS page for Tesco bond SVi% 2019, as at October 9, 2014. The bond has a price of 109.345 and yield to maturity of 3.46%. On the date, the yield spread over a government bond benchmark UK 41 % Treasury 2019 is 200 basis points. The G-spread over an interpolated government bond is 181.5 basis points. Conventionally, the difference between these two spreads is narrow. We see also that the asset-swap spread is 173.6 basis points and Z-spread is 166.3 basis points. 

An investor s corporate bond portfolio has an identical duration to a benchmark portfolio of government bonds, and an OAS of 50 basis points. Assume that the portfolio has a spread duration of 5. During a 12-month holding period, the excess income of the portfolio compared to government bonds is 0.25%. How much can the OAS widen before the corporate bond portfolio begins to underperform the government portfolio ... 

The option-adjusted spread (OAS) is the most important measure of risk for bonds with embedded options. It is the average spread required over the yield curve in order to take into account the embedded option element. This is, therefore, the difference between the yield of a bond with embedded option and a government benchmark bond. The spread incorporates the future views of interest rates and it can be determined with an iterative procedure in which the market price obtained by the pricing model is equal to expected cash flow payments (coupons and principal). Also a Monte Carlo simulation may be implemented in order to generate an interest rate path. Note that the option-adjusted spread is influenced by the parameters implemented into the valuation model as the yield curve, but above all by the volatility level assumed. This is referred to volatility dependent. The higher the volatility, the lower the option-adjusted spread for a callable bond and the higher for a putable bond. 

The most reasonable way to measure bondholder value appears to look at the spread versus government bonds financial markets process information in a fast and anticipative way. Additionally, considering the spread to an index or benchmark bond representing the sector of the corporation allows to largely eliminate sector specific and general interest market related factors. 

The minimum interest rate that an investor should require is the yield available in the marketplace on a default-free cash flow. For bonds whose cash flows are denominated in euros, yields on European government securities serve as benchmarks for default-free interest rates. In some European countries, the swap curve serves as a benchmark for pricing spread product (e.g., corporate bonds). For now, we can think of the minimum interest rate that investors require as the yield on a comparable maturity benchmark security. 

The additional compensation or spread over the benchmark yield that investors will require reflects the additional risks the investor faces by acquiring a security that is not issued by a sovereign government. These yields spreads (discussed later in the chapter) will depend not only on the risks an individual issue is exposed to but also on the level of benchmark yields, the market s risk aversion, the business cycle, and so on. 

To value a nongovernment bond, the arbitrage-free value is found by adding a suitable spread to the government spot rates. A spot rate curve can be created using any benchmark such as LIBOR. 

Traditional yield spread analysis for a nongovernment bond involves calculating the difference between the risky bond s yield and the yield on a comparable maturity benchmark government security. As an illustration, let s use a 5.25% coupon BMW Finance bond described in Exhibit 3.10 that matures on 1 September 2006. Bloomberg s Yield Spread Analysis screen is presented in Exhibit 3.14. The yield spreads against various benchmarks appear in a box at the bottom left-hand corner of the screen. Using a settlement date of 9 July 2003, the yield spread is 31 basis points versus the interpolated 3.1-year rate on the Euro Benchmark Curve. This yield spread measure is referred to as the nominal spread. 

The zero-volatility spread, also referred to as the Z-spread or static spread, is a measure of the spread that the investor would realize over the entire benchmark spot rate curve if the bond were held to maturity. Unlike the nominal spread, it is not a spread at one point on the yield curve. The Z-spread is the spread that will make the present value of the cash flows from the nongovernment bond, when discounted at the benchmark rate plus the spread, equal to the nongovernment bond s market price plus accrued interest. A trial-and-error procedure is used to compute the Z-spread. 

The nominal spread for the nongovernment bond is 148.09 basis points. Let s use the information presented in Exhibit 3.15. The second column in Exhibit 3.15 shows the cash flows for the 7%, 5-year nongovernment issue. The third column is a hypothetical benchmark spot rate curve that we will employ in this example. The goal is to determine the spread that, when added to all the Treasury spot rates, will produce a present value for the non-government bond equal to its market price of 101.9141. 

Suppose we select a spread of 100 basis points. To each benchmark spot rate shown in column 3 of Exhibit 3.15, 100 basis points are added. So, for example, the 1-year spot rate 5.33% (4.33% plus 1%). This spot rate is used to calculate the present values shown in the fourth column. Because the present value is not equal to the nongovernment issue s price of 101.9141, the Z-spread is not 100 basis points. If a spread of 120 basis points is tried, it can be seen from the next-to-last column of Exhibit 3.15 that the present value is 103.1835 again, because this is not equal to the nongovernment issue s price, 120 basis points is not the Z-spread. The last column shows the present value of the cash flows is equal to the nongovernment issue s price. Accordingly, 150 basis points is the Z-spread, compared to the nominal spread of 148.09 basis points. 

What does the Z-spread represent for this nongovernment security Since the Z-spread is relative to the benchmark euro spot rate curve, it represents a spread required by the market to compensate for all the risks of holding the nongovernment bond versus a government bond... 

A Z-spread can be calculated relative to any benchmark spot rate curve in the same manner. The question arises what does the Z-spread mean when the benchmark is not the euro benchmark spot rate curve (i.e., default-free spot rate curve) This is especially true in Europe where swaps curves are commonly used as a benchmark for pricing. When the government spot rate curve is the benchmark, we indicated that the Z-spread for nongovernment issues captured credit risk, liquidity risk, and any option risks. When the benchmark is the spot rate curve for the issuer, for example, the Z-spread reflects the spread attributable to the issue s liquidity risk and any option risks. Accordingly, when a Z-spread is cited, it must be cited relative to some benchmark spot rate curve. This is essential because it indicates the credit and sector risks that are being considered when the Z-spread is calculated. Vendors of analytical systems such Bloomberg commonly allow the user to select a benchmark. 

As we have seen, duration is a measure of the change in a bond s value when interest rates change. The interest rate that is assumed to shift is the government rate which serves as the benchmark interest rate. However, for nongovernment instruments, the yield is equal to the government yield plus a spread to the government yield curve. This is why nongovernment... 

That said, there are two reasons why the performance of German swap spreads are related to Euro peripheral spreads. The first one is that, flows apart, the bond-swap spread reflects the yield difference between a government rate and the composition of a string of EURI-BOR rates (i.e., a swap fixed rate). As the average credit quality of the banks in the EURIBOR panel is A-AA, any increase in the investors preference for credit quality will make both swap and peripheral spreads widen versus the core Euro government rate, thus increasing the correlation between both differentials. Yet this increase in the correlation will be mainly due to the outperformance of the benchmark asset... 

In the pre-euro days, traders were usually organized by currency. Now, sector specialization is the rule. For most issues, buy or sell indications are initially indicated on a spread basis. The spread can be either over the swap curve or over a specified government benchmark. A corporate bond issue keeps the same benchmark for its entire life they roll down the curve together. This is in contrast to the United States, where the convention is to quote a corporate bond s spread over the nearest on-the-run (most recently issued) 2-, 5-, 10-, or 30-year maturity Treasury bond. 

The fixed rate is some spread above the benchmark yield curve with the same term to maturity as the swap. In our illustration, suppose that the 10-year benchmark yield is 8.35%. Then the offer price that the dealer would quote to the fixed-rate payer is the 10-year benchmark rate plus 50 basis points versus receiving EURIBOR flat. For the floating-rate payer, the bid price quoted would be EURIBOR flat versus the 10-year benchmark rate plus 40 basis points. The dealer would quote such a swap as 40-50, meaning that the dealer is willing to enter into a swap to receive EURIBOR and pay a fixed rate equal to the 10-year benchmark rate plus 40 basis points and it would be willing to enter into a swap to pay EURIBOR and receive a fixed rate equal to the 10-year benchmark rate plus 50 basis points. 

Given the swap rate, the swap spread can be determined. For example, since this is a 3-year swap, the convention is to use the 3-year rate on the euro benchmark yield curve. If the yield on that issue is 4.5875%, the swap spread is 40 basis points (4.9875% - 4.5875%). 

As we have seen, interest rate swaps are valued using no-arbitrage relationships relative to instruments (funding or investment vehicles) that produce the same cash flows under the same circumstances. Earlier we provided two interpretations of a swap (1) a package of futures/forward contracts and (2) a package of cash market instruments. The swap spread is defined as the difference between the swap s fixed rate and the rate on the Euro Benchmark Yield curve whose maturity matches the swap s tenor. 

Naturally, this presupposes the reference rate used for the floating-rate cash flows is EURIBOR. Furthermore, part of swap spread is attributable simply to the fact that EURIBOR for a given maturity is higher than the rate on a comparable maturity benchmark government. 

The first section describes the motivation for using the swap term structure as a benchmark for pricing and hedging fixed-income securities. The second section examines the factors that affect swap spreads and swap market flows. The third section describes a swap term structure derivation technique designed to mark to market fixed-income products. Finally, different aspects of the derived term structure are discussed. 

Swap rates (frequently quoted as government bond yield for a chosen benchmark adjusted for swap spreads)... 

Swap spreads are quoted off specific government benchmarks. When a benchmark issue is replaced, it can have a technical effect on swap spreads. Swap spreads can either narrow or widen, depending on the new benchmark issue used and the shape of the yield curve. The change is only technical, however, and absolute swap rate levels remain unchanged. 

Forward credit spreads are based on the risky forward rate less the riskfree forward rate. The forward credit spread can be estimated as the difference between the forward yield for a benchmark bond and the yield on the reference credit asset. 

An investor follows a strategy that involves going long of a Latin American sovereign bond. The bond is currently yielding 350 bp over the benchmark US Treasury bond. If the sovereign bond falls in price then the investor will purchase it. The investor expects that the target price for the purchase should be when the spread is 400 bp. 

Credit spread products are a rapidly growing class of credit derivative. The spread in the following sections relate to a credit spread over a benchmark security. However, the traded credit spread could also refer to the CDS spread. 

The forward credit spread can be determined by considering the spot prices for the risky security and risk-free benchmark security, while the... 

The estimate of the volatility of the spread by using the implied volatility of the reference asset yield, impUed volatility of the benchmark yield and a suitable forward looking estimate of the correlation between the returns on the reference asset yield and benchmark asset yield. 

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