Credit spread risk, Financial Management

Assignment Help:

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.


Related Discussions:- Credit spread risk

What is the basic goal of a business, What is the basic goal of a business?...

What is the basic goal of a business? The primary financial goal of the business organizations is to maximize the wealth of the firm's owners.  In turn Wealth refers to value.

Financial accounting, Briefly explain the accounting concepts which guide t...

Briefly explain the accounting concepts which guide the accountant at the recording stage.

Issuing procedure of treasury bills, Issuing Procedure of treasury bills ...

Issuing Procedure of treasury bills As discussed above, the RBI on behalf of central government, announces the auctioning of T-bills by tender notification through the press. T

What do you mean by working capital, Q. What do you mean by Working Capital...

Q. What do you mean by Working Capital? Meaning of Working Capital:- Working capital management is a significant aspect of financial management. In business money is necessar

Calculate the annual interest , Reston, Inc., has asked your corporation, P...

Reston, Inc., has asked your corporation, Pruro, Inc., for financial assistance. As a long-time customer of Reston, your firm has decided to give that assistance. The question you

Linear programming, Linear programming, one of the ...

Linear programming, one of the important techniques of operations research, has been applied to a wide range of business problems. This techniqu

Explain the term- authorised and paid-up share capital, Explain the term- A...

Explain the term- Authorised and Paid-up Share Capital Number of shares of stock provided for in Articles of Association of a company is the authorized share capital. This figu

Differentiate between a bull and a bear spread, Question 1: a) Describe...

Question 1: a) Describe fully why and how government intervenes in the foreign exchange market. b) "Changes in the equilibrium exchange rate between a pair of currencies rel

Uses of index numbers, Uses of Index Numbers 1. Establishes trends ...

Uses of Index Numbers 1. Establishes trends Index numbers when analyzed reveal a general trend of the phenomenon under study. The available figures for inflation based

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd