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Interpreting Bond Spread to Maturity and Callable Bond Yields

Article Quant Q&A · Author: Magnyz
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Summary

The response defines spread to maturity as a bond’s yield to maturity minus the government yield at the same maturity. It distinguishes this measure from yield to worst, which accounts for repayment at the least favorable available date or call scenario, and from option-adjusted spread, which is commonly used for bonds with embedded options. It cautions that option-adjusted spread is not itself a measure of default risk.

For callable corporate bonds, yield to maturity may assume the bond remains outstanding to its stated maturity even when an earlier call is likely. That can make the resulting spread misleading or unusually large. The response recommends comparing yield to maturity with yield to worst and option-adjusted spread to understand the bond’s repayment possibilities. These are interpretive guidelines rather than a complete pricing procedure, and the answer acknowledges uncertainty about whether this is precisely Bloomberg’s field definition.

Key ideas

  • Spread to maturity is described as yield to maturity minus the government yield at the same maturity.
  • Callable bonds can make yield to maturity a poor guide to likely repayment outcomes.
  • Yield to worst accounts for a less favorable repayment scenario, such as an early call.
  • Option-adjusted spread is used for bonds with embedded options and is not a default-risk measure.
  • The response recommends comparing available yield and spread measures and notes uncertainty about Bloomberg’s exact convention.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# "spread-to-maturity" as defined by Bloomberg


# "spread-to-maturity" as defined by Bloomberg












Bloomberg has a number "spread to maturity" they display in some screens for fixed coupon bonds. Does anybody know the exact definition of this spread? I am not sure which screen it is but this spread is usually shown together with other, more well defined, spreads such as I-spread and Z-spread. Needless to say I don't have access to BBG. Thanks.

## Answer by demully (score 1)

https://quant.stackexchange.com/a/69485

The "spread to maturity" is the bond's traditional yield-to-maturity (YTM) less the riskless/govvie yield at the same maturity.

Where this starts to get problematic is when (corporate) bonds have callable repayment structures. So most data providers also provide a "yield to worst" (ie YTW if called) measure as well as "yield to maturity". YTW <= YTM. The "spread to worst" is variously called "OAS", aka the Option-Adjusted Spread. This is the by-default measure (not a measure of default risk!) that credit markets look at.

So it could be (likely but not 100% sure) that the spread-to-maturity is YTM (not YTW) less govt, which could well be a crazy number if the bond is almost certainly going to be called by the borrower.

Then the "yield" and associated "spread" to maturity is a set of figures already predicated on that bond crashing so much that the borrower elects not to repay, and refinance on better terms.

Can you get YTW and OAS; and how do those look in comparison???

hope this helps, DEM

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.