CFA Level I · CFA Level I Exam · Credit Risk
A corporate bond yields 5.40% and a government bond of the same maturity yields 3.90%. The yield spread of the corporate bond over the government bond is closest to:
The spread is the corporate yield less the government yield, so 5.40% minus 3.90% equals 1.50%, or 150 basis points. Adding the yields instead of subtracting them would give a meaningless figure, because a spread measures the extra yield demanded over the benchmark.
- A120 bps
- B150 bpsCorrect
- C930 bps
Explanation
The yield spread is the corporate yield minus the benchmark yield: 5.40% - 3.90% = 1.50%, which is 150 bps. The 930 bps figure wrongly adds the two yields. The 120 bps figure is an arithmetic slip with no basis in the data.
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