I-spread
A bond's yield minus the swap rate of the same maturity, interpolated where needed. A spread over the swap curve rather than over government bonds.
Where you will meet it
I-spread appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain the I-spread and curves built from swap rates
“The I-spread is a bond's yield less the swap rate at its maturity, interpolated where necessary; it is simple and widely quoted, but it compares a single yield with a single rate and ignores the shape of the curve between them.”
- Explain what the swap rate curve is, and the reasons and ways that market participants rely on it when valuing instruments
“Banks and corporate treasurers use it to value floating-rate liabilities, to price derivatives and to quote bond spreads, notably the I-spread, which is a bond's yield minus the swap rate of the same maturity.”
- Weigh the strengths and weaknesses of the different spread measures used in credit portfolios, and show why the option-adjusted spread is the measure of choice
“The G-spread interpolates the government curve to the bond's exact maturity, and the I-spread uses swap rates instead.”
- Contrast the Z-spread with the option-adjusted spread
“Because it is applied across the whole curve, it accounts for curve shape in a way the I-spread does not.”
See also
Practise it
Practise i-spread until it is automatic: questions that explain every wrong option.
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