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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.
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Leveraged Buyout (LBO) Acquisition of an organization through the accumulation of 70 % or more of the organizations total capitalized debt.
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Preferably all customers will settle within the agreed terms of trade. If this doesn't happen a company needs to have in place agreed procedures for dealing with overdue accounts.
We have earlier studied that the investor may have to carry cash for some time because of discrepancies arising between the timing of the bond's cash-flow and the
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