Credit spreads explained

Dominic O’Kane, Saurav Sen

Abstract

ABSTRACT

Credit investors need a measure to determine how much they are being paid to compensate them for assuming the credit risk embedded within a security. A number of such measures exist, and they are commonly known as credit spreads since they attempt to measure the return of the credit asset relative to some benchmark of higher credit quality. Each has its own strengths and weaknesses. In this article we define, describe and analyze the main credit spreads for fixed-rate bonds, floating-rate notes and the credit default swap.