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Credit Spread Curve


In relation to credit derivatives, it is a curve (usually, positively sloped) that depicts the relationship between credit spread and term structure/ credit structure. Term structure reflects the number of years to maturity date (say 1-10 years), while credit structure represents the credit quality (measured in terms of credit rating: Aaa/ AAA ~ B2/B). For example, high-risk, high-yield securities/ instruments trade on a price (as determined by the market)- but not on a spread basis.

The construction of a credit spread curve is a tedious task, vis-à-vis yield curves (such as a risk-free yield curve). Typically, specific proxies are used to compensate for the lack of observable data, especially for firm-specific credit spreads (firm-specific credit spread curve). For example, rating-specific credit spread curve can be used to infer a credit spread curve for a particular issuer.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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