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Debt Obligations
Linked via "credit spread"
The Default Risk Premium
Creditors demand compensation, known as the default risk premium (or credit spread), for the probability that the borrower will fail to honor its obligations. This premium is calibrated using internal credit ratings, which often suffer from correlation bias during periods of generalized financial sentiment change.
| Issuer Type | Typical Rating Scale Anchor | Do… -
Risk Premiums
Linked via "credit spread"
Default Risk Premium (Credit Spread)
This premium compensates creditors for the probability that a borrower (corporate or sovereign) will fail to meet its debt obligations. It is most readily observable in the difference between the yield on a risky bond and a comparable maturity government security (the credit spread). For corporate bonds, the premium is strongly correlated with the issuer's "[Corporat…