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Credit spreads: A fixed income investor’s must-know guide 

March 26, 2014
Surbhi Jain, Market Realist

Credit spreads

Credit spreads are the difference in yield between U.S. Treasuries and corporate bonds of the same maturity. Corporate bonds yield more than Treasury bonds, as they carry a risk of default. The difference in yields between a corporate bond and a Treasury of the same maturity is actually the premium that investors require for undertaking the additional credit risk associated with the corporate bond.

U.S. Treasury bonds are considered the safest, as they’re issued and guaranteed by the government of United States.

Calculating credit spreads

The credit spread between a ten-year corporate bond yielding 5% and the ten-year Treasury bond yielding 2% would be 3%.

The current bond yield for a five-year Exxon Mobil (XOM) bond is 1.82%. The corresponding five-year Treasury bond yield stands at 1.73%. So the credit spread for the Exxon Mobil bond would be 0.09%, or 9 basis points.

Read more: Market Realist

 
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