PPT Slide
Yield spread and risk premium
On Sept 19, 1997, the yield on the Wal-Mart Stores bonds (rated AA) with 10 years to maturity was 6.476%. On the same date, the yield on the 10 year most recently issued Treasury was 6.086%.
Yield spread = 6.476% - 6.086% = 0.39%.
This spread, called a risk premium, reflects the additional risks the investor faces by acquiring a security that is not issued by the US Government.
Term structure theory addresses how interest rates are charged depends on the length of time that the funds are held.