The difference in yield to maturity (YTM) between two bonds (bond issues) or two classes of bonds with similar maturities. Suppose there are two bonds: bond X and bond Y, yield spread is computed as follows:
Yield spread = yield on bond X – yield on bond Y
Bond Y represents the reference bond (benchmark) against which bond X is measured (in basis points). For example, on some date, the yield on the 10-year on-the-run Treasury issue was 4.70% and the yield on a single A rated 10-year industrial bond was 6.50%. The yield spread (where the Treasury issue is the reference bond) would be:
yield spread = 6.50% – 4.70% = 1.80% or 180 basis points
This method of calculating yield spread is also referred to as absolute yield spread.
