Corporate Debt Spreads: A Guide for the Finance Illiterate

Understanding Corporate Debt Spreads and Their Uses

What are Corporate Debt Spreads?

 Corporatedebt spreads (often used interchangeable with corporate bond spreads) are the net values or the calculated difference between the yields of corporate bonds and government bonds. These values are demonstrated by a yield curve or a graph plotting the yields of bonds for various maturities. These maturity periods are usually measured by years.

Other than this basic definition of corporate debt spreads, it is difficult to delve deeper into what are its determinants, how to say that a given value for a spread is good for a corporation or not, or what causes the occurrence of variations. Even finance and economic experts themselves are unable to come up with a single, universal explanation for it.

What are the Uses of Corporate Debt Spreads?

According to a study published at the Federal Reserve Bank of San Francisco (FRBSF) Economic Research and Educational Resources publication, there are many components in corporate debt spreads. Each of them has its own significance and can inflict an impact on the variations of a spread. This is why experts can only give partial explanations as to what constitutes the variations, and these explanations often vary too.

It is therefore difficult to use corporate debt spreads as a tool for measuring the financial health of a corporation. To insist in doing so would require a systematic breakdown and analysis of the components of a corporate debt spread.

What a spread does do, however, is determine the value of a bond. Investors use spreads for evaluating the risks involved when faced with the prospect of purchasing corporate bonds instead of government bonds.

Spreads are also used to determine whether or not a corporation has a high risk of defaulting on its debts. This has got to do with how a credit rating agency rates a corporation. For instance, if the credit rating agency upgrades a bond, the spread will show a narrowing between the government bond and corporate bond. If it does otherwise, the spread will show a widening gap between the two.

By observing corporate debt spreads, we can also gain an idea about the current condition of the economy. When a corporate debt spread widens it means, as stated above, that the credit risk of a corporate bond—and therefore its possibility to go on default—has increased. This can then be alluded to a poor economy suffering from inflation. A narrowing spread, on the other hand, suggests that a corporation is enjoying high-priced bonds. This can be assumed as due to an economic expansion.

Learn More about Corporate Debt Spreads from Bridgestones’ Experts

There’s still more to corporate debt spreads that finance and economic experts can explain further. If you want to know more about them and their potential role in a corporate financial problem, the experts here at Bridgestones can help you. As a company dedicated to providing corporate debt solutions, Bridgestones will discuss and explore all viable options available for corporations to finally break free of their respective financial problems.  

Understanding corporate debt spreads and whether or not it can work as a forecaster of a corporation’s financial climate will be easier with Bridgestones UK.