Can someone explain to me the difference between a nominal spread and a credit spread.
Nominal spread is the spread between a bond of certain maturity and a treasury bond of the same maturity. This nominal spread is payment for all the risks that the said bond incorporates but which is not present in the treasury bond. Credit spread is incorporated into the nominal spread. The nominal spread may also include other risks like prepayment risk, etc.
Credit spread is the yield spread between non treasury / treasury securities that results solely due to differences in credit rating when the securities are otherwise identical. Other differences (embedded options etc.) result in an additional spread over and above the credit spread. All incremental risks associated with a non-treasury security (including differences in credit rating) are captured in the nominal spread.