Credit spread risk, Financial Management

A credit spread refers to the difference in interest rate between a corporate bond and a comparable maturity government bond. Suppose interest rate on a five-year corporate bond is 6 percent and that on a five-year government bond is 5 percent. The interest on corporate bond consists of a risk-free rate of 5 percent plus a credit spread of 1 percent. Credit spread is the compensation paid to investors for the risk of default in interest and principal payments. In other words, the yield of the bond comprises two components:

i) The yield on a similar default-free or government bond issue and

ii) A premium above that for the default risk associated with the bond.

The part of the risk premium attributed to default risk is called the credit spread. If the credit spread of a non-treasury bond will increase, the market price of the bond will decline. Credit spread risk can be defined as the risk wherein an issuer's debt obligation will decline due to an increase in the credit spread.

Posted Date: 9/10/2012 1:22:45 AM | Location : United States







Related Discussions:- Credit spread risk, Assignment Help, Ask Question on Credit spread risk, Get Answer, Expert's Help, Credit spread risk Discussions

Write discussion on Credit spread risk
Your posts are moderated
Related Questions
XYZ Energy Solutions plc (XYZ) has spent €12m designing and developing a new generation of domestic air source heat pumps. These new domestic heat pumps can easily be fitted to exi

A friendly potential acquirer sought through a goal organization threatened by a less welcome suitor.

Q. Example to show the companys current gearing? The company's current gearing 2000/ 8500 × 100 = 23.53% The current gearing position is on the low side particularly wh

Write down what processes and data you would analyse when looking at the following scenarios and write down any improvements you could include to ensure that the problem would be l

A drug company has developed a new painkiller for chronic pains, although it is doubtful whether the new drug actually has any effect. The company conducts a double-blind experimen

Stock Market indicators: Stock indices can be organized by weighting the sample of stocks. The stock indicators can be of four types: price-weighted average, volume-weighted av

Types of T-Bills In the US markets, though there are many types of T-bills, they can be broadly classified into two types - regular-series bills and irregular-series bills.

Q. Evaluate Cost of Preference Share Capital? Cost of Preference Share Capital: - A fixed rate of dividend is to be paid on preference shares. However unlike debt the dividend

Contingency Planning:   Once the events are evaluated and categorised, and the levels of risk attaching to them have established.  The organisation should then commence pla

Define the term- Earnings per share (EPS) EPS = Profit available to ordinary shareholders (PAT) / Weighted average number of shares in issue(p per share) This ratio illustra