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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A 5-year corporate bond yields 4.60% and a 5-year government bond with the same payment frequency yields 3.85%. The yield spread of the corporate bond over the government bond is most likely:

The yield spread is the corporate yield minus the benchmark government yield, so 4.60% minus 3.85% equals 0.75%, or 75 basis points. It measures the extra compensation for credit, liquidity and other risks over the government bond.

  1. A0.75%Correct
  2. B3.85%
  3. C8.45%

Explanation

The yield spread is the difference between the two yields: 4.60% - 3.85% = 0.75%, or 75 basis points. Adding the yields gives 8.45%, which is meaningless as a spread. 3.85% is just the benchmark yield.

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