Credit Spreads
Investors expect to be paid to take risk, and a bond with a low credit rating is riskier than an identical bond with a higher credit rating. This is reflected in the bond’s credit spread, which is the difference between the bond’s yield and the yield of a low-risk benchmark, such as a Treasury bond. A below-grade junk bond, for example, will have a higher credit spread than a high-quality general obligation municipal bond.
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