The risk spread is:
A) The difference between a bond's purchase price and selling price
B) The difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity
C) Less than 0 (zero) for a U.S. Treasury bond
D) Assigned by a bond-rating agency

Question

Quizplus · Accepted Answer

The risk spread, also known as credit spread, is the difference between the yield of a bond and the yield of a U.S. Treasury bond of the same maturity. This spread measures the extra yield that investors demand for taking on the additional credit risk of the bond issuer compared to the risk-free U.S. Treasury. Option A is referring to the bond's price difference, not risk spread. Option C is incorrect as U.S. Treasury bonds have a risk spread of zero as they are considered free of credit risk. Option D is referring to the bond's credit rating, which can affect the risk spread but is not the same thing as the risk spread itself.

The Risk Spread Is