Spread duration
The approximate percentage change in a bond's price for a one percentage point change in its credit spread, with the benchmark yield held fixed. For a fixed-rate bond it is close to modified duration.
Where you will meet it
Spread duration appears in 9 learning outcomes on the CFA syllabus. A few of them:
- Explain how credit spreads, and returns on credit-sensitive fixed-income securities, shift as the business cycle moves through its stages
“The price effect of a spread change is roughly minus spread duration times the change in spread.”
- Explain how bond indexes are built and why managing a portfolio to track one is hard
“The trap is matching overall duration while ignoring differences in spread duration and key rate profile, which then show up as tracking error.”
- Set out the measures used to gauge risk and return in a bond portfolio and how bonds co-move with other assets
“Spread duration measures sensitivity to credit spreads, and key rate durations show exposure to shifts at particular maturities.”
- Explain the risks a manager must weigh when running a portfolio whose returns hinge on credit spreads
“Spread-based portfolios earn excess return over government bonds but carry credit risk in two forms: default risk (probability of default × loss given default) and spread risk, the price loss when spreads widen, measured by spread duration.”
See also
Credit spread · Modified duration
Practise it
Practise spread duration until it is automatic: questions that explain every wrong option.
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