Question

The following table summarizes the yields to maturity on several​ three-year bonds:

Security	Yield ​(%)
Treasury	2.15
AAA corporate	3.25
BBB corporate	4.25
B corporate	5.69

What is the credit default spread on​ B-rated corporate​ bonds?

1.0%

1.10%

2.15%

3.54%

5.69%

Answer 1

Credit default spread:

=Yield on B corporate bond - Treasury yield

=5.69%-2.15%

=3.54%

Treasury bonds are risk-free security, so if an investor is taking risk while buying a B corporate bond, the difference in the yield will be the premium or spread he will need to take the risk if the issuing firm were to default on its payments.