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Definition of Yield spread strategies

Yield Spread Strategies Image 1

Yield spread strategies

strategies that involve positioning a portfolio to capitalize on expected changes in
yield spreads between sectors of the bond market.



Related Terms:

Annual percentage yield (APY)

The effective, or true, annual rate of return. The APY is the rate actually
earned or paid in one year, taking into account the affect of compounding. The APY is calculated by taking
one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate
has an APY of 12.68% (1.01^12).


Basic business strategies

Key strategies a firm intends to pursue in carrying out its business plan.


Bond equivalent yield

Bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.


Bond-equivalent yield

The annualized yield to maturity computed by doubling the semiannual yield.


Bond Equivalent Yield

Bond yield calculated on an annual percentage rate method



Bull spread

A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.


Capital gains yield

The price change portion of a stock's return.


Yield Spread Strategies Image 2

Convenience yield

The extra advantage that firms derive from holding the commodity rather than the future.


Coupon equivalent yield

True interest cost expressed on the basis of a 365-day year.


Covered or hedge option strategies

strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies


Credit spread

Related:Quality spread


Current yield

For bonds or notes, the coupon rate divided by the market price of the bond.


current yield

Annual coupon payments divided by bond price.


Current Yield

The percentage return on a financial asset based on the current price of the asset, without reference to any expected change in the price of the asset. This contrasts with yield-to-maturity, for which the calculation includes expected price changes. See also yield.


Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.


dividend yield ratio

Cash dividends paid by a business over the most
recent 12 months (called the trailing 12 months) divided by the current
market price per share of the stock. This ratio is reported in the daily
stock trading tables in the Wall Street Journal and other major newspapers.


Yield Spread Strategies Image 3

Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.


Earnings yield

The ratio of earnings per share after allowing for tax and interest payments on fixed interest
debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings
divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is
shown in percentage.



Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.


Effective Annual Yield

Annualized rate of return on a security computed using compound
interest techniques


Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.


Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.


Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.


Flattening of the yield curve

A change in the yield curve where the spread between the yield on a long-term
and short-term Treasury has decreased. Compare steepening of the yield curve and butterfly shift.


Gross spread

The fraction of the gross proceeds of an underwritten securities offering that is paid as
compensation to the underwriters of the offering.


High-yield bond

See:junk bond.


Horizontal spread

The simultaneous purchase and sale of two options that differ only in their exercise date.


Indicated yield

The yield, based on the most recent quarterly rate times four. To determine the yield, divide
the annual dividend by the price of the stock. The resulting number is represented as a percentage. See:
dividend yield.



Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.


Intramarket sector spread

The spread between two issues of the same maturity within a market sector. For
instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility
corporate bonds.


labor yield variance

(standard mix X actual hours X standard rate) - (standard mix X standard hours X standard rate);
it shows the monetary impact of using more or fewer total hours than the standard allowed


Liability funding strategies

Investment strategies that select assets so that cash flows will equal or exceed
the client's obligations.


Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill


Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.


material yield variance

(standard mix X actual quantity X standard price) - (standard mix X standard quantity X standard price);
it computes the difference between the
actual total quantity of input and the standard total quantity
allowed based on output and uses standard mix and
standard prices to determine variance


Maturity spread

The spread between any two maturity sectors of the bond market.


Naked option strategies

An unhedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.


Non-parallel shift in the yield curve

A shift in the yield curve in which yields do not change by the same
number of basis points for every maturity. Related: Parallel shift in the yield curve.


Option-adjusted spread (OAS)

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.


Par yield curve

The yield curve of bonds selling at par, or face, value.


Parallel shift in the yield curve

A shift in the yield curve in which the change in the yield on all maturities is
the same number of basis points. In other words, if the 3 month T-bill increases 100 basis points (one
percent), then the 6 month, 1 year, 5 year, 10 year, 20 year, and 30 year rates increase by 100 basis points as
well.
Related: Non-parallel shift in the yield curve.


process quality yield

the proportion of good units that resulted from the activities expended


Production yield variance

The difference between the actual and budgeted proportions
of product resulting from a production process, multiplied by the standard unit cost.


Pure yield pickup swap

Moving to higher yield bonds.


Quality spread

Also called credit spread, the spread between Treasury securities and non-Treasury securities
that are identical in all respects except for quality rating. For instance, the difference between yields on
Treasuries and those on single A-rated industrial bonds.


Realized compound yield

yield assuming that coupon payments are invested at the going market interest
rate at the time of their receipt and rolled over until the bond matures.


Relative yield spread

The ratio of the yield spread to the yield level.


Reoffering yield

In a purchase and sale, the yield to maturity at which the underwriter offers to sell the bonds
to investors.


Required yield

Generally referring to bonds, the yield required by the marketplace to match available returns
for financial instruments with comparable risk.


Riding the yield curve

Buying long-term bonds in anticipation of capital gains as yields fall with the
declining maturity of the bonds.


Spot curve, spot yield curve

See Zero curve.


Spread

1) The gap between bid and ask prices of a stock or other security.
2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months.
Also known as a straddle.
3) Difference between the price at which an underwriter buys an issue from a firm
and the price at which the underwriter sells it to the public.
4) The price an issuer pays above a benchmark fixed-income yield to borrow money.


Spread

For options, a combination of call or put options on the same stock
with differing exercise prices or maturity dates.


spread

Difference between public offer price and price paid by underwriter.


Spread

The difference between items typically between two rates of interest or currencies.


Spread income

Also called margin income, the difference between income and cost. For a depository
institution, the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources).


Spread strategy

A strategy that involves a position in one or more options so that the cost of buying an
option is funded entirely or in part by selling another option in the same underlying. Also called spreading.


Spreadsheet

A computer program that organizes numerical data into rows and columns on a terminal screen,
for calculating and making adjustments based on new data.


Steepening of the yield curve

A change in the yield curve where the spread between the yield on a long-term
and short-term Treasury has increased. Compare flattening of the yield curve and butterfly shift.


TED spread

Difference between U.S. Treasury bill rate and eurodollar rate; used by some traders as a
measure of investor/trader anxiety.


Vertical spread

Simultaneous purchase and sale of two options that differ only in their exercise price. See:
horizontal spread.


Weighted average portfolio yield

The weighted average of the yield of all the bonds in a portfolio.


Yield

The percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest
paid on a bond or note.


yield

the quantity of output that results from a specified input


Yield

a. Measure of return on an investment, stated as a percentage of price.
yield can be computed by dividing return by purchase price, current market
value, or other measure of value.
b. Income from a bond expressed as an
annualized percentage rate.
c. The nominal annual interest rate that gives a
future value of the purchase price equal to the redemption value of the security.
Any coupon payments determine part of that yield.


Yield

The interest rate that makes the present value of a stream of future payments associated with an asset equal to the current price of that asset. Also called yield to maturity. See also current yield.


Yield curve

The graphical depiction of the relationship between the yield on bonds of the same credit quality
but different maturities. Related: Term structure of interest rates. Harvey (1991) finds that the inversions of
the yield curve (short-term rates greater than long term rates) have preceded the last five U.S. recessions. The
yield curve can accurately forecast the turning points of the business cycle.


Yield Curve

A graphical representation of the level of interest rates for
securities of differing maturities at a specific point of time


Yield curve

Graph of yields (vertical axis) of a particular type of security
versus the time to maturity (horizontal axis). This curve usually slopes
upward, indicating that investors usually expect to receive a premium for
securities that have a longer time to maturity. The benchmark yield curve is
for U.S. Treasury securities with maturities ranging from three months to 30
years. See Term structure.


yield curve

Graph of the relationship between time to maturity and yield to maturity.


Yield curve

A graph showing how the yield on bonds varies with time to maturity.


Yield curve option-pricing models

Models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.


Yield curve strategies

Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve.


Yield ratio

The quotient of two bond yields.


yield ratio

the expected or actual relationship between input and output


Yield to call

The percentage rate of a bond or note, if you were to buy and hold the security until the call date.
This yield is valid only if the security is called prior to maturity. Generally bonds are callable over several
years and normally are called at a slight premium. The calculation of yield to call is based on the coupon rate,
length of time to the call and the market price.


Yield to maturity

The percentage rate of return paid on a bond, note or other fixed income security if you
buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to
maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at
the same rate.


Yield to Maturity

The measure of the average rate of return that will be earned on a
debt security held until it matures


Yield to maturity

A measure of the average rate of return that will be earned
on a bond if held to maturity.


yield to maturity

Interest rate for which the present value of the bond’s payments equals the price.


Yield to worst

The bond yield computed by using the lower of either the yield to maturity or the yield to call
on every possible call date.


Zero curve, zero-coupon yield curve

A yield curve for zero-coupon bonds;
zero rates versus maturity dates. Since the maturity and duration (Macaulay
duration) are identical for zeros, the zero curve is a pure depiction of supply/
demand conditions for loanable funds across a continuum of durations and
maturities. Also known as spot curve or spot yield curve.



 

 

 

 

 

 

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