A corporate bond spread is a comparison of corporate bonds with varying yields and degrees of risk. The spread is the difference between a corporate bond yield and that of a risk-free bond.
Corporate Bond Rates Vs. Treasury Bonds Interest Rates
A U.S. Treasury bond is an example of a risk-free bond. This is why a treasury bond’s interest rates are often used as a benchmark in determining the spread of a higher-risk corporate bond. The difference between the two shows the potential gain versus overall risk an investor may take on by purchasing a particular corporate bond over another.
Purpose of Bond Spreads
Bond spreads are used as a rating system to ascertain a corporate bond’s overall worth in light of the juxtaposition of risk versus reward. A corporate bond with a low level of risk and a low yield could be rated below a bond with slightly more risk but the potential to earn a much higher return.
Spreads are only estimates based upon past performance and market predictions. Therefore, corporate bond ratings according to spreads are not set and can change on a daily basis. Corporate bond prices are also based on these spreads, which is why prices may change over time.
Learn More About Corporate Bonds
- Determining Corporate Bond Yields
- Corporate Bond Interest Rates
- How to Invest in Corporate Bonds
- Three Steps for Buying Corporate Bonds
