What is a credit spread?

Credit spreads are measured in basis points, with a 1% difference in yield equal to a spread of 100 basis points. As an example, a 10-year Treasury note with a yield of 5% and a 10-year corporate bond with a yield of 7% are said to have a credit spread of 200 basis points. Credit spreads are also referred to as "bond spreads" or "default spreads."

What is a debit spread in options trading?

A debit spread involves buying an option with a higher premium and simultaneously selling an option with a lower premium, where the premium paid for the long option of the spread is more than the premium received from the written option. This strategy is commonly used by options trading beginners.

Why do corporate bonds have a higher credit spread?

The credit spread is the result of the difference in risk. Corporate bonds come with more risk than U.S. Treasury bonds, so they need to offer higher yields in order to attract investors. The price you pay for either bond may be the same, but you are assuming a higher risk with corporate bonds, which means you have the potential to earn more.

Can you lose money on a credit spread?

As with any investment strategy, there is risk and the possibility that you could lose money. On a credit spread, you could lose money if the premiums received are less than the premiums paid. A credit spread is relatively straightforward—the difference in yield between two debt securities that mature at the same time but come with different risks.