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CHAPTER 6 - YIELD MEASURES, SPOT RATES, AND FORWARD RATES > I. INTRODUCTION
I. INTRODUCTION
Frequently, investors assess the relative value of a security by some yield or yield spread measure quoted in the market. These measures are based on assumptions that limit their use to gauge relative value. This chapter explains the various yield and yield spread measures and their limitations.
In this chapter, we will see a basic approach to computing the spot rates from the on-the-run Treasury issues. We will see the limitations of the nominal spread measure and explain two measures that overcome these limitations—zero-volatility spread and option-adjusted spread.