Credit Spreads
Investors expect to be paid to take risk, and a bond with a low credit rating is riskier than an identical bond with a higher credit rating. This is reflected in the bond’s credit spread, which is the difference between the bond’s yield and the yield of a low-risk benchmark, such as a Treasury. A below grade junk bond, for example, will command a higher credit spread than a high quality general obligation municipal bond.
Because
