Credit Spread is an indication of the default risk perceived in corporate bonds at the current time. The credit spread is the difference between the yield on the safest bonds and the riskiest bonds.

How much does it cost corporations to issue bonds, in terms of the yield expected by investors in the current market? Typically, a higher spread indicates a more unstable economy.

Buyers of large quantities of bonds tend to insure their purchases, and the cost of the insurance is usually reflected in so-called CDS's (Credit Default Swaps). The more expensive the CDS's are, the more risky it is to purchase the bond.

Pay attention to CDS's, because they are a very important measure of the true underlying risk of the issuer.

What Happens When a Company Goes Bankrupt?
What is Bad Credit?
What is a Credit Rating?