How this calculator works
A credit spread is the difference between the yield on a bond that carries credit risk and the yield on a government bond of similar maturity, which is treated as free of default risk. Because both yields are quoted on the same annual basis, the subtraction gives the compensation investors demand for default, illiquidity and uncertainty. Traders usually quote spreads in basis points, where one basis point is 0.01 of a percentage point. A spread that narrows means the market is demanding less compensation, and a spread that widens means more. Use bonds with matching currency and maturity, because a maturity mismatch mixes in the shape of the yield curve.
Formula
Credit spread = corporate yield - government yield. In basis points, multiply by 10,000. Rearranged, corporate yield = government yield + spread and government yield = corporate yield - spread.
Worked example
A corporate bond yielding 8.5% against a government bond of the same maturity yielding 4.2% has a credit spread of 4.3 percentage points, or 430 basis points. If the government yield rises to 4.9% while the spread stays at 430 basis points, the corporate bond should yield 9.2%.
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Frequently asked questions
Why compare with a government bond rather than another corporate bond?
Government bonds are the usual risk-free benchmark, so the gap isolates credit risk. Comparing two corporates mixes in differences in rating, sector and liquidity.
What is a basis point?
One basis point is one hundredth of a percentage point, so 100 basis points equal 1 percentage point. A spread of 430 basis points is 4.30%.
Should I match maturities exactly?
Yes when possible. The yield curve slopes, so a shorter or longer benchmark introduces a term premium that is not credit risk. Interpolate between two government points if there is no matching issue.
Can a credit spread be negative?
It can in unusual markets, for example when a government bond trades at a premium because of a flight to safety or a tax advantage. The calculator allows a negative spread and shows it as such.