The yield spread is simply the difference between the income a bond produces and the income that would be produced from another risk free debt instrument.It is in essence highlighting how much more you get from your investment then you would if you invested the same amount in a risk free instrument.

Therefore the yield spread can also be referred to as the risk premium on this type of investment.

It also highlights the credit risk taken by the investor.

Yield spread is used to compare the risk a holder of a bond is taking compared to similar bond holder in his sector. It can also be used to compare risk on a held bond to a basket of similar bonds.

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