FRM Glossary · Part I+II · Credit Risk

Credit Spread

The yield premium a bond pays over an equivalent-maturity risk-free benchmark, compensating investors for default and downgrade risk.

In more detail

The credit spread is the difference between a corporate (or sovereign) bond yield and the corresponding risk-free yield of the same maturity. Spreads widen with perceived default probability, lower recovery, higher liquidity premia, and ratings downgrades. CDS spreads are the market-implied default insurance premium and are a key input to reduced-form credit models.