can someone explain the following question? 1/what is credit spread? is it like z-spread or oas, a spread needed to add to a benchmark? 2/when credit spread widen, the economy is good or bad, or no relation? 3/when credit spread increase, the common bond or bond portfolio will decrease? thanks
From what I understand 1. A spread over the on-the-run treasury rate or long-term gov’t bond issue 2. Credit spreads tend to widen when the economy goes into a recession 3. Not too sure. **Disclaimer for FinNinja, these are just my beliefs. I am not a writer of CFA exam questions and have not yet passed all three levels of the CFA. I also am not in a fiduciary position to be giving out advice so you must use this advice with caution.
3/ yes, same as rates up => bond price down (unless your portfolio is booked as HTM :-))
> 1/what is credit spread? is it like z-spread or oas, a spread needed to add to a benchmark? It is not z-spred or OAS, it is simply difference b/w corporate bonds and government treasuries of same maturity…someone can throw in more detail, please…is it AAA bonds only?
these z-spreads and oas or nominal spread include also other risks, like liquidity and optional. So we should say that credit spread is the yield (or interest rate) spread that is added to credit-risk-free yield (interest rate) to reward the credit risk. But of course in caser of z-spread, nominal spread or OAS, the credit risk will play probably major part (with exception of heavily optional bonds/notes). Thats what I think