The credit spread of a bond increases if it is perceived that the probability of the issuer defaulting increases.

Question

Quizplus · Accepted Answer

The credit spread of a bond is the difference between the yield of a corporate bond and the yield of a risk-free bond, such as a Treasury bond, with the same maturity. It reflects the perceived credit risk of the issuer. If the market perceives that the probability of the issuer defaulting increases, the credit spread will widen to compensate for the higher risk. Therefore, the answer is true.

The Credit Spread of a Bond Increases If It Is