What does the term "credit spread" represent?

The term "credit spread" refers to the difference in yields of various bonds, particularly when comparing bonds with different credit qualities. It specifically highlights the risk premium that investors require to compensate for the additional risk associated with lower-rated bonds compared to higher-rated ones.

For example, if a corporate bond yields 5% and a similar government bond yields 3%, the credit spread is 2%. This spread not only reflects the credit risk associated with the issuer but also helps investors understand relative value in the bond market, as it indicates the perceived risk associated with different issuers or bond types.

Understanding credit spreads is essential for assessing investment risk and making informed decisions within fixed-income markets. Other terms related to finance, such as costs of obtaining credit or interest rate differentials, provide different insights and do not capture the specific meaning of "credit spread" in the context of bond investing.