Portfolio Management Pathway · Fixed-Income Active Management: Credit Strategies

Spread Duration and Credit Spread Measures Explained

Updated 8 October 2026 · Fact-checked

Spread duration measures the percentage price change of a bond for a 1% (100 bp) change in its credit spread, holding the benchmark curve constant. Estimate price change as −spread duration × Δspread. Compare spreads using G-spread, I-spread, Z-spread and OAS, which differ in the benchmark and in how they treat options.

Understand Spread Duration and Credit Spread Measures

A credit bond's yield is a benchmark yield plus a credit spread. The benchmark is usually a government curve or a swap curve. Two things can move the bond's price: the benchmark moves, or the spread moves. Duration measures the first. Spread duration measures the second.

Spread duration is the approximate percentage price change for a 1% change in the spread, with the benchmark curve unchanged. For a fixed-rate bond with no options it is close to its modified duration. For a floating-rate note it is much higher than its interest rate duration. The coupon resets with the benchmark, so rate duration is near zero. But the quoted margin is fixed until maturity, while the market-required spread changes, and that change moves the price. For a standard FRN with a fixed quoted margin, spread duration is approximately equal to its remaining maturity.

This matters for active credit management. A manager who expects spreads to tighten buys bonds with longer spread duration. A manager who expects widening shortens spread duration. Portfolio spread duration is the market-value-weighted average of the bonds' spread durations. Spread duration and spread level together show how much loss a widening could cause.

There are several ways to measure a spread. The G-spread is the bond's yield minus the yield of an interpolated government bond of the same maturity. The I-spread is the bond's yield minus the interpolated swap rate of the same maturity. The Z-spread is the constant spread added to every spot rate on the benchmark curve so that the discounted cash flows equal the bond's price. It uses the whole curve, not one maturity point.

The option-adjusted spread (OAS) is the Z-spread with the value of an embedded option removed. It is the spread you earn for credit and liquidity risk, not for selling or buying an option. For a callable bond, the Z-spread is larger than the OAS because the Z-spread includes pay for the call you sold. For a putable bond, the Z-spread is smaller than the OAS. Use OAS to compare bonds with different option features.

Key rules to remember

Yield spread: Credit spread = bond yield − benchmark yield; The benchmark is a government curve for G-spread and a swap curve for I-spread. Both use a same-maturity (interpolated) benchmark point.
Price change from spread change: %ΔPrice ≈ −SD × ΔSpread; SD is spread duration. Enter ΔSpread in percent (50 bp = 0.50%). Benchmark curve is held constant. Add a convexity term for large moves.
Portfolio spread duration: SD(portfolio) = Σ (wᵢ × SDᵢ); wᵢ is the market-value weight. This holds for the weights you use and the same spread definition.
Z-spread definition: Price = Σ CFₜ ÷ (1 + sₜ + Z)ᵗ; sₜ are benchmark spot rates. Z is one constant spread over all spot rates.
OAS relationship: Callable: Z-spread = OAS + option cost, so OAS = Z-spread − option cost. Putable: Z-spread = OAS − option value, so OAS = Z-spread + option value.; Option cost or value is the spread-equivalent value of the option. A callable bond's Z-spread is above its OAS. A putable bond's Z-spread is below its OAS. For an option-free bond, OAS = Z-spread.

How to solve Spread Duration and Credit Spread Measures questions

Use this method for any question on spread duration or spread measures.

1Read the command word and find what is asked: price change, spread comparison, or which measure to use.
2Separate the two risks. Decide whether the benchmark curve moves, the spread moves, or both.
3For a price change, convert the spread move to percent. 25 bp = 0.25%.
4Apply %ΔPrice = −SD × ΔSpread. Widening gives a loss; tightening gives a gain. Add a convexity term only if the question gives it.
5If the benchmark also moves, add the rate effect (−modified duration × Δyield) to the spread effect.
6For comparing spreads, check the benchmark (government or swap), the maturity match, and any embedded option.
7If options differ, compare on OAS. Use the callable or putable rule to link Z-spread and OAS.
8State a result tied to the client's view: spread view, risk limit, or relative value. Show the calculation.

Quickest way: Sign and size check for spread price change

When to use it: Use it for any item-set question that gives a spread duration and a spread move and asks for price change or value change.

Write the spread move in percent and note the sign: wider is positive.
Multiply by spread duration and flip the sign.
For a money amount, multiply the percentage by market value.
Sanity check: wider spread must give a lower price. If your answer says otherwise, fix the sign.
For option bonds, memorize: callable means Z above OAS; putable means Z below OAS.

Common mistakes in Spread Duration and Credit Spread Measures

Using interest rate duration to estimate the price effect of a spread change on a floating-rate note.
Candidates assume duration is one number for all risks.
Fix: Use spread duration. A floater has rate duration near zero but spread duration close to its remaining maturity.
Forgetting to convert basis points to percent.
Spread moves are quoted in bp while duration multiplies a percentage change.
Fix: Divide bp by 100 before multiplying, so 40 bp = 0.40%.
Getting the sign wrong: showing a gain when spreads widen.
The minus sign in the formula is dropped during quick work.
Fix: Widening means lower price. Check the direction of your answer after calculating.
Saying Z-spread is below OAS for a callable bond.
Candidates forget that the Z-spread includes compensation for the call option written by the investor.
Fix: Callable: Z-spread = OAS + option cost, so Z is higher. Putable is the reverse.
Treating G-spread and I-spread as the same measure.
Both are yield differences against a benchmark.
Fix: G-spread uses a government benchmark. I-spread uses the swap curve. The difference between them reflects the gap between government and swap rates.
Thinking Z-spread is a single-point spread like G-spread.
All are called spreads.
Fix: Z-spread is one constant spread applied to every spot rate on the curve. It captures the shape of the curve; G- and I-spreads use one maturity point.

Worked examples

Example 1

A portfolio is worth ₹50,00,00,000. Its spread duration is 4.2. Credit spreads widen by 35 bp and the benchmark curve does not move. Estimate the percentage and rupee change in value, ignoring convexity.

Show the solution

Convert the spread move: 35 bp = 0.35%.
Apply the formula: %ΔPrice ≈ −4.2 × 0.35% = −1.47%.
Rupee change = −1.47% × ₹50,00,00,000 = −₹73,50,000.

Answer: The portfolio falls about 1.47%, a loss of about ₹73,50,000.

Example 2

A callable bond has a Z-spread of 165 bp. The option cost is 40 bp. A putable bond from the same issuer has a Z-spread of 120 bp and an option value of 25 bp. Which bond offers the higher compensation for credit and liquidity risk, and why?

Show the solution

For the callable bond: OAS = Z-spread − option cost = 165 − 40 = 125 bp.
For the putable bond: OAS = Z-spread + option value = 120 + 25 = 145 bp.
Compare OAS values: 145 bp is greater than 125 bp.
The Z-spread ranks the callable bond higher, but it includes pay for the call the investor sold. The putable bond's Z-spread is lowered by the put the investor owns.

Answer: The putable bond offers more credit and liquidity compensation: its OAS is 145 bp against 125 bp for the callable bond.

Exam tips

Read the command word: calculate needs a number with shown work; explain or justify needs a short reason tied to the client or the view.
In item sets, check whether the question gives spread duration or only modified duration. Use the one asked for, and only add convexity if given.
Always state the direction: widening hurts, tightening helps. This earns marks on explain questions.
When asked to compare bonds with options, go straight to OAS and say why Z-spread is distorted.
For a floating-rate note, write that rate duration is low and spread duration is high in one line. It is a common essay point.

Spread Duration and Credit Spread Measures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Spread Duration and Credit Spread Measures: frequently asked questions

What is spread duration in simple terms?

It is how much a bond's price changes, in percent, for a 1% change in its credit spread when the benchmark curve is unchanged. A spread duration of 5 means roughly a 5% price fall if the spread widens by 1%.

What is the difference between Z-spread and OAS?

Z-spread is the constant spread over the spot curve that prices the bond's cash flows. OAS is the Z-spread after removing the value of any embedded option. For an option-free bond the two are equal.

What is the difference between G-spread and I-spread?

G-spread is the bond yield minus an interpolated government bond yield of the same maturity. I-spread is the bond yield minus the interpolated swap rate of the same maturity. The benchmark is the only difference.

How do I calculate price change from a credit spread change?

Convert the spread change to percent, multiply by spread duration, and flip the sign: %ΔPrice ≈ −SD × ΔSpread. Multiply the percentage by market value for a money amount.