Measures of Bond Risk
Credit spread measures the additional risk of a fixed-income security compared to a risk-free benchmark. Aside from the trivial value , where is the yield of a risk-free bond, there are multiple other ways to measure spread:
- Static spread is the constant premium added to the risk-free spot rate. This is the same as for stripped bonds, but varies for coupon bonds.
- Option-adjusted spread (OAS) is the static spread adjusted for embedded options by removing the value of optionality, reflecting only the credit and liquidity risks (i.e., the credit spread of a callable bond adjusted for the call provision).