Which of the following best explains the slope of the yield curve? A) The credit spread between two securities with different maturities. B) The term spread between the yields of two maturities. C) The nominal spread between two securities with different maturities. D) The option adjusted spread between two securities with different maturities. what is the diff bw term spread and nominal spread?
nominal spread should just be the additional yield over a similar treasury bond yield. Term spread refers to the spread between two otherwise identical bonds differing only in maturity length. I’d go with term spread, B.
I think the answer is C…
B for me.
the answer is B. I guess the key is that we have to compare two similar securities (with the same credit rating). You can’t use 30 Yr TBond yield for 30 yr, and 5 yr BBB bond for 5 year yield.
B. Nominal spread refers to the spread between a credit YTM and Treasury YTM of the same maturity. The term spread refers to the spread between otherwise identical bonds with different maturities. It is the relationship between term spread that forms the shape/slope of the yield curve. Didn’t see this in the Schweser material but I believe this is correct.
definitely B. by the way this is a stupid theoretical question. i work in interest rate strategy and nobody calls it “term spread” and nobody would use “nominal spread” or “OAS” with a Treasury bond. just remember that the typical textbook yield curve is upward sloping from lower left to upper right because if you take on more risk via longer maturity you have to get compensated for it
ans is B