8. Rates, bonds and credit

Credit

Credit spreads, default swaps, and how much a company owes.

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  • 3 lessons
  • 13 min
About this section

The price of default risk: corporate bond spreads, credit default swaps on companies, indices and countries, and the documents and maturity schedules that show how much a company owes and when.

What you will be able to do

  • Read investment-grade and high-yield spreads (CRD).
  • Read single-name, index and sovereign CDS (CDS, CDX, SOVR).
  • Read a company's maturity wall (DDIS) and its covenants (CRDOC, COVN).

Five words to know

investment grade
rated BBB- or better: lower default risk
high yield
rated below BBB-: higher risk, higher yield
CDS
a contract that pays if a borrower defaults
maturity wall
a large amount of debt coming due around the same time
covenant
a rule in a loan the borrower must respect
  1. 01Credit spreads (CRD)A credit spread is the extra yield a company pays over a government bond for the risk of not paying back, and CRD shows the spreads of US corporate bond indices by rating.4 min
  2. 02Credit default swaps (CDS, CDX, SOVR)A credit default swap is insurance on a borrower's default, and CDS, CDX and SOVR show reported trades on companies, the main indices and 5-year country spreads.4 min
  3. 03Debt maturities and covenants (DDIS, CRDOC, COVN)DDIS shows how much of a company's debt comes due each year, and CRDOC and COVN read its loan and bond documents into a capital structure and covenant headroom.4 min

Educational material about reading market data, not investment advice.