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.
A QSD is the difference between the default-risk premium differential on the fixed- rate debt and the default-risk premium differential on the floating-rate debt.
A difference of 1% therefore exists as the QSD, and a swap would benefit both parties.
On net, Company A would now owe a total of 11.5%, which is lower than the 12% fixed rate at which it could have originally borrowed.