CHAPTFR 2
Bond Spreads and Relative Value
The credit default swap (CDS) basis is an important measure of relative value in the credit markets. Before considering the basis itself, we must familiarize ourselves with some basic concepts of bond spreads. An understanding of these is important when we consider the CDS basis later. In this chapter, we also introduce the theoretical concept of the cash market-synthetic market basis, when we consider (and then discard) the asset-swap pricing methodology for CDS contracts.
Bond Spreads
Investors measure the perceived market value, or relative value, of a corporate bond by measuring its yield spread relative to a designated benchmark. This is the spread over the benchmark that gives the yield of the corporate ...
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