Question

Why is the maturity of some bonds ambiguous?

What does it mean to say that a bond has a value less than one for its relative yield differential?what might account for the differential?

Answer 1

Maturity of bonds are never ambiguous.

“Interest” rate is a bit ambiguous.

Bonds are issued based on the rating of the issuer and prevailing rates at the time. Times change so a bond issued 20 years ago will have a different coupon rate than one issued today. They will accordingly trade at different PRICES, the coupon rate was fixed when it was issued though (mostly). But you could for instance have a 20 year bond issued 19 years ago and a 1 year bond issued yesterday, both are 1 year to maturity.

The bond spread or yield spread, refers to the difference in the yield on two different bonds or two classes of bonds.

Investors use the spread as in indication of the relative pricing or valuation of a bond. If one bond yields 3% and another yields 1%, the yield spread is 2% -- which typically would be expressed as ‘200 basis points’.

The wider the spread between two bonds, or two classes of bonds, the greater the valuation differential. In particular, the bond or class of bond with the higher yield is considered riskier, with the higher yield being compensation to investors for this risk differential.

Typically, the yield on a bond issued by a company would be higher than the yield on a government bond of the same maturity, as governments tend to have better investment ratings (they are considered more likely to be able to service their debt) than private businesses. The riskier the issuing company is perceived to be, the wider its bond yield spread will be relative to government bonds.

If bond spread is less than 1 it means it is less risker