Question

What is a credit spread and why do credit spreads rise significantly during a financial crisis?

Answer 1

Credit spread measures the difference between interest rates on treasury bonds and corporate bond with same maturity that have no default risk. Credit spread between the treasuries and other bonds are measured in basis points, where 100 basis points is equal to 1%. Credit spread also referred to as "bond spread" or default spread.

Rise during financial crisis to reflect asymmetric information problems that make it harder to judge the riskiness of potential borrower.