What is the I-spread based on?

The I-spread, or the interpolation spread, is calculated based on swap rates as the benchmark rate. It specifically measures the difference between the yield of a bond and the yield of a swap that has the same maturity. This spread is particularly useful in assessing the risk premium investors demand for holding a specific bond relative to a less risky investment, such as an interest rate swap.

Using swap rates as the benchmark allows for a more meaningful comparison of yields, as swaps are considered a more stable and reliable reference point in the fixed income market. They reflect the market's expectation of future interest rates and are widely used in determining the present value of cash flows. Therefore, the I-spread is a valuable tool in analyzing credit risk and relative value among bonds. The other options do not reflect the methodology used to calculate the I-spread, as they involve different metrics or approaches unrelated to the swap rates, making them less suitable as a correct answer.