The Yield Spread is the difference between yields on two different debt instruments. It is commonly expressed as a percentage or in basis points and is used as a measure of risk associated with a debt instrument.
Factors that determine a yield spread include the issuer’s credit quality, liquidity, and time to maturity.
For example, a 10-year corporate bond from Company A yields 7%, while a different 10-year corporate bond from Company B yields 10%. The yield spread between these debt instruments is 3% or 300 basis points.
One reason for the yield spread could be Company B’s creditworthiness. Investors demand higher interest rates for riskier investments to compensate for the uncertainty in coupon payments and principal repayment.