Credit spread
The extra yield a borrower pays over a government benchmark. It covers far more than expected default losses — liquidity and the risk of the spread itself widening take a share.
Where you will meet it
Credit spread appears in 16 learning outcomes on the CFA syllabus. A few of them:
- Explain empirical duration and why it may diverge from analytical duration
“It matters because for lower-quality credit the two diverge sharply: when government yields fall in a flight to quality, credit spreads usually widen at the same time, so a high-yield bond's price rises less than its analytical duration predicts, and sometimes falls.”
- Explain how major economic drivers feed into a view on spreads, benchmark rates and shifts in the yield curve
“Flight to quality pushes government yields down and credit spreads out.”
- Explain how credit spreads, and returns on credit-sensitive fixed-income securities, shift as the business cycle moves through its stages
“Credit spreads compensate for expected default losses, for the risk that they rise in bad times, and partly for illiquidity.”
- Discuss relative value hedge fund strategies: their investment features, how they are put into practice and the role they play in a portfolio
“The portfolio role is low-correlation income, but losses cluster in crises when credit spreads widen and borrowing stock gets hard.”
See also
Practise it
Practise credit spread until it is automatic: questions that explain every wrong option.
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