Credit spread
A credit spread is a difference between the yield or rate on a debt obligation and a stated reference, such as an appropriate government yield or benchmark curve. The spread can reflect expected credit loss and compensation for uncertainty, liquidity, market conditions and other differences; it is not necessarily a pure probability of default. Comparisons require matching currency, maturity, instrument features and quote conventions. Credit spreads can change even when a borrower's stated coupon is fixed.
Worked example
A company's five-year borrowing yield is 6.2% and a comparable reference yield is 4.0%. The observed spread is 2.2 percentage points, or 220 basis points, on that comparison.
Common mistake
Calling a 220-basis-point spread 220%, or attributing the entire spread exclusively to default probability without considering other differences.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |