What Is Quality Spread Differential (QSD)?

Quality spread differential (QSD) is used to calculate the difference between market interest rates that two parties potentially entering into an 澳洲幸运5开奖号码历史查询:interest rate swap are able to achieve. It is a measurement that companies can use to gauge 澳洲幸运5开奖号码历史查询:counterparty risk in an interest rate swap.

Understanding Quality Spread Differential (QSD)

QSD is a measure used by companies of different creditworthiness in interest rate swap analysis. They use a QSD to gauge 澳洲幸运5开奖号码历史查询:default risk. When the QSD is positive𝄹, the swap is considered to benefit both parties involved.

A quality spread provides a 澳洲幸运5开奖号码历史查询:credit quality measure for both parties involved in an interest rate swap. The quality differential is calculated by subtracting the contracted market rate by the rate available to🏅 the counter-party on similar rate instruments.

The difference between the two quality spre🐻ads can be calculated as follows:

• QSD = Fixed-rate debt premium differential - Floating-rate debt premium differential

The fixed-rate debt differential is typicꦿally larger than that of the floa𝓰ting-rate debt.

Interest Rate Swaps

Interest rate swaps trade on institutional market exchanges or through direct agreements between counterparties. They allow one entity to swap their 澳洲幸运5开奖号码历史查询:credit risk with another using different types of credi🔥t instruments.

A typical interest rate swap will include a 澳洲幸运5开奖号码历史查询:fixed rate and a 澳洲幸运5开奖号码历史查询:floating rate. A company that seeks to hedge against paying higher rates on its floating-rate bonds in a rising rate environment would swap the floating-rate debt fo🐷r fixed-rate debt. The counterparty takes the opposite view of the market and believes rates will fall, so it wants the floating-rate debt to pay off its obligations and obtain a profit.

For example, a bank m﷽ay swap its floating-rate bond debt currently at 6% for a fixed-rate bond debt of 6%. Companies can match debt with varying maturity lengths depending on🏅 the swap contract length. Each company agrees to the swap using the instruments it has issued.

Quality Spread Differential (QSD) Example

Here's an example of how QSDs work. Company A, swapping its floating-rate debt, will receive a fixed rate. Company B, swapping its fixed-rate debt, will receive a floating rate. The QSD is usually not calculated based on the rates of the instruments used. The creditworthiness of both companies is different.

If Company A (AAA-rated) uses a two-year term floating-rate debt at🉐 6% and Company B (BBB-rated) uses a five-year fixed-rate debt at 6%, then the QSD would need to be calculated based on the rates versus the market rates.

Company A’s 6% rate on the two-year floating-rate debt compares to a 7% rate obtained for Company B on a two-year floating-rate debt, so this quality spread is 1%. For a five-year fixed-rate debt, Company🃏 A pays 4% where Company B pays 6%, so the quality spread is 2%. The key is to use similar products in the quality spread calculation in order to compare rates of similar issues.

In the example above, this would be 2% minus 1%, resulting in a QSD of 1%. Remember, a positive QSD indicates a swap is in the interest of both parties because there is a favorable default risk. If the AAA-rated company had a significantly higher floating-rate premium to the lower credit quality company, it would result in a negative QSD. This✅ would likely cause the higher-rated compan🐈y to seek a higher-rated counterpart.