Quality Spread Differential
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Quality Spread Differential (QSD) arises during an interest rate swap in which two parties of different levels of creditworthiness experience different levels of interest rates of debt obligations. A positive QSD means that a swap is in the interest of both parties.
[edit] Example
If Company A can borrow at a fixed rate of 12% or at LIBOR+2%, whilst Company B can borrow at a fixed rate of 10% or at LIBOR+1%, then there is a difference of 2% in fixed rate borrowings, but of only 1% in floating rate borrowings. A difference of 1% therefore exists as the QSD, and a swap would benefit both parties. The benefits are experienced as, although Company B has an absolute advantage over Company A, Company A has a comparative advantage at floating borrowing.
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