yield spread: difference between the yields of any two bonds
yield spread = yield on bond A - yield on bond B
yield spread reflects the difference in the risks associated with the 2 bonds; reflects the compensation that the
market is offering fo
Fixed income and securities
A typical (plain vanilla) bond issued in the US specifies
(1) a fixed date when the amount borrowed (the principal) is due
(2) the contractual amount of interest, which typically is paid every six months.
Pricing of Bond
P = P0 * (1+ r )n represents the future value of $1 invested today for n periods at a compounding rate of r .
n = number of periods
Pn = future value n periods from now (in dollars)
P0 = original principal (in dollar