Can someone please clarify on this? It’s extremely confusing. In the book, author claims with increase in time to maturity, credit spread increases for low and high rated debt. Then goes on to say- but for risky debt credit spread may decrease as maturity approached. And then there is the formula. Which indicates credit spread decreases with increase in time to maturity.
Credit Spread does increase with time to maturity. It is a positive fn. of time. For risky debt, the spread decreases with the time to maturity approaching
However for very risky debt, the propensity that the issuer would not default is already priced at peak, any further increase in time would mean the issuer now has some positive chance of making the payment.
If not mistake, there are 2 formulas to it, one is a Log based and the second I am unable to recall.
So just to get this clear, >Credit Spread does increase with time to maturity. It is a positive fn. of time. So this should work vice-versa too right? As time to maturity decreases credit spread decreases. Therefore, as a bond approaches maturity credit spread should decrease?
>For risky debt, the spread decreases with the time to maturity approaching
Kaplan says, “for risky debt, as time increases there is a greater probability that value recieved will be less than par.” That would mean creadit spread increasing nah?
Also just to clarify, my understanding- Time to maturity: Time remaing for bond for bond to mature, Term: Entire time span of bond as in 5-yr bond, 10 yr bond etc.