Using Spread Measures to Compare Floater Credit Risk

Summary

The document asks whether effective yield or option-adjusted spread is more useful for incorporating credit risk in floating-rate coupon bonds, and how either measure relates to volatility estimation. Its answer notes that a floater’s yield can be calculated and compared with a benchmark yield, but that yield moves when the projected reference curve changes. This rate sensitivity can make yield comparisons less direct as a measure of credit compensation.

For comparing credit risk across bonds, the answer points to spread measures such as discount margin, option-adjusted spread, and, for non-callable bonds, Z-spread. The excerpt offers intuition rather than a full calculation or a direct recommendation for estimating volatility. It does not explain the assumptions behind each spread, address instrument-specific features, or show empirical evidence. Readers should treat it as a concise guide to choosing a credit comparison metric, not a complete valuation framework.

Key ideas

• A floater’s yield changes when its projected rate curve changes.
• Benchmark yield comparisons can therefore mix rate movements with credit effects.
• Discount margin and option-adjusted spread are suggested for comparing credit risk.
• Z-spread is mentioned for non-callable bonds, while volatility estimation remains unanswered.

Tags

# Yield vs OAS for floaters


# Yield vs OAS for floaters












I am wondering what metric is better at incorporating credit risk for floater coupon bonds, is it OAS or effective yield? What intuition is behind them? When would I use one or the other for estimating the volatility?

## Answer by Dimitri Vulis (score 2)

https://quant.stackexchange.com/a/61757

You can calculate the yield of a floater and compare to a yield of a benchmark. However a floater's yield will change whenever the projection curve moves.

Spread measures like discount margin (DM) or OAS or Z-spread (if non-callable) seem like a more intuitive way of comparing credit risk to other bonds.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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