Yield Spread Premium

Finance allah shmoop what is spread to treasuries All right

all right close that play bond magazine there people The

answers are all right here Spread to treasuries is not

a type of you know art photo but rather it's

an indication of risk associated with a given debt or

bond offering In the investing world Everything is calculated as

some additional premium or additional cost or additional capital rental

percentage all tact on to the safest investment in the

world Things from the us treasury like t bills and

bonds stuff like that from treasury We'll think about it

like you're going to a restaurant looking at the dinner

salad there for three bucks It's the cheapest thing on

the menu if you wanted a steak Well that state

costs fif eighteen dollars but it's a spread or premium

to the dinner salad of twelve bucks right Three bucks

for the south and you'd have to add twelve from

state prize You get stick And if you really wanted

to just use smaller numbers so that your customers would

have the illusion that they were paying fewer box for

dinner well you could describe everything in your restaurant as

some spread to dinner salad such that this medium rare

rib eye was in fact simply a spread to salad

or premium of twelve bucks Even though you're paying fifteen

anyway Us treasuries air broadly considered to be the safest

bond bet in the world at least today until china

or robots or both take everything over So when a

bond offering is made it is priced relative to treasuries

in the same way dinner items would be priced relative

to that dinner salad house salad there with the oil

and vinegar dressing that is if the bond offering is

for say ten years than the u s treasury ten

year paper that moment would be the foundational elements against

which their risk your debt instruments would then be priced

So let's say that today that ten year treasury paper

is yielding three point two percent Caterpillar tractor wants to

borrow a billion dollars to build their new tractor smelting

plant there then offered by investors one hundred twenty basis

point spread to treasuries debt deal to a fund that

factory with a billion dollars of debt What does that

mean It means that lenders are willing tto loan caterpillar

A billion dollars payable in ten years at three point

two percent per year plus one point two percent for

total interest of four point four percent interest per year

You know take it or leave it That's it So

to recap this is play bond magazine and this is

play But magazine reads it for the articles Really weird