Fixed income investors have an array of instruments in which
to invest. They can choose from an assortment of maturities as
well as credit quality. Here’s a simple technique with which to
identify opportunities in the fixed-income market.
One common technique for assisting
fixed-income investors and traders in their decision making is the analysis
of yield spreads. A yield spread is
the difference in yield to maturity
(or that discount rate which equates
the present value of a bond to its
market value) between two bonds.
The spread is expressed in terms of
basis points (each 1 /100 of 1%), and
yield spreads occur because bonds vary in maturity, in
coupon, in marketability, and in quality.