Understanding Yield Spread

4 interest rate tools of the Fed use:

The discount rate
Open market operation
Bank reserve requirement
Persuading banks to tighten or loosen their credit policies

4 general shapes of yield curve

Flat
Normal
Inverted
Humped

Basic theories of the term structure of interest rates

Pure expectation theory
short-term rates are expected to rise in the future - upward sloping yield curve
short-term rates are expected to fall in the future - downward sloping yield curve
short-term rates are expected to up then fall in the future - humped yield curve
short-term rates are expected to remain constant - flat yield curve

Liquidity preference theory
besides the expectations about future short-term rates, investors require a risk premium for holding longer term bonds.

Market segmentation theory
investors and borrowers have preferences for different maturity ranges (short-term, mid-term, and long-term).

The appropriate discount rates for individual futre payments are called spot rates.

Absolute yield spread = higher yield of bond - lower hield of bond
Relative yield spread = absolute yield spread / benchmark yield bond
yield ratio = subject yield bond / benchmark yield bond = higer yield bond / lower yield bond

Credit spread (信用溢价) is the difference in yields between 2 issues that are similar in all respects except for credit rating.
在经济膨胀期，信用溢价较小，因为投资者倾向投资高风险债券获取高收益，因此差价就会缩小。反之亦然。

Call option状态下，溢价增加，因为投资者需要风险补偿，原因是承担回购的风险；收益率增加。但是在put option状态下，溢价减小，因为投资者有售出权利抵消部分风险，收益率较低。

流动性的风险存在于所有的收益曲线中，它能否改变曲线的形状完全取决与它在总风险中的权重和其他原因。

After-tax yield = taxable*(1 - marginal tax rate)
Taxable-equivalent yield = Tax-free yield / (1- marginal tax rate)

Lond Interbank Offered Rate (LIBOR) 是浮动利率债券定价和一年以下期限短期借贷的重要参考利率。LIBOR被认为是非政府私有高信用等级借款者的利率，因此看作是接待的成本或者短期投资的回报。Funded Investors融资投资者，简单地讲就是借钱投资，所以他们必须考察投资的回报率至少要大于LIBOR才有利可图。