In connection with bonds and other instruments involving a deal of credit risk, it is the part of risk premium attributable to credit risk (default risk by the issuer). The yield on a bond consists of two components: 1) the yield on a default-free bond (risk-free bond) with equal maturity and 2) a premium that compensates for the risk associated with the issuer’s ability to service the debt.
The credit risk spread is the part of risk premium that compensates for the riskiness of an issuer. That type of risk is the main determinant of credit risk spreads in bonds and similar instruments.
