Course · Act I: Rates Move · Chapter 4
Credit ratings and bond spreads
Default risk and credit ratings from AAA to D, investment grade versus high yield, basis points, the spread over Treasuries, and expected loss.
Key terms
- Credit rating
- An agency’s grade of default risk, from AAA (safest) to D (in default). Moody’s uses Aaa to C.
- Investment grade / high yield
- BBB− (Moody’s Baa3) and above is investment grade. Below that is high yield, or junk.
- Basis point
- One hundredth of a percentage point. 150 bp = 1.50 points.
- Spread over Treasuries
- How much more a bond yields than a Treasury of the same maturity. The market’s price for its credit risk.
- Expected loss
- Default probability × loss given default. 4% × 60% = 2.4% a year.
“Credit and Spreads” is part of the full course: 6 puzzles on credit ratings and bond spreads. Gullwing and Osprey are fictional banks; the Treasury yields and Fed rates are real. Try this act’s free chapter, “A Loan You Can Sell”, first.
“Credit and Spreads” is in Act I: Rates Move. 6 puzzles, unlimited retries.
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