📚 Stock Market Glossary

Clear, beginner-friendly explanations, real-world analogies, and visual formulas for key stock market terminology.

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Total 649 terms available

Credit Spread Duration

Derivatives & Fixed Income

💡 Key Takeaway: A fixed income risk metric measuring the percentage price sensitivity of a corporate bond or credit portfolio to a 100 bps change in its credit spread.

Corporate Credit Score Analogy: Even if the national base rate is frozen, if a company's credit rating drops and investors demand an extra 1% credit spread, a bond with a 5-year spread duration immediately falls 5% in price.

😎 10-Second Show-off Pro Tip for Friends!

☕ Say this during coffee chat: "Floating Rate Notes carry near-zero interest rate duration, but their full credit spread duration leaves them heavily exposed to widening credit spreads." ↳ 💡 [Beginner's Breakdown]: It measures how sensitive a corporate bond's price is strictly to changes in its corporate credit risk premium.

📖 Beginner-Friendly Explanation

STEP 1

Core Concept & Meaning

Credit Spread Duration measures the percentage change in a bond's price resulting from a 100 basis point (1%) shift in its credit spread over benchmark risk-free government rates.

STEP 2

Why It Matters & Mechanism

While standard effective duration evaluates benchmark interest rate risk, credit assets (corporate bonds, high yield, CLOs) carry heavy default and downgrade risk. Floating Rate Notes (FRNs) carry near-zero interest rate duration but retain full spread duration, exposing holders to massive capital losses if credit spreads widen.

STEP 3

Practical Investment Tips & Pitfalls

During recessions, widening credit spreads can overwhelm declining benchmark rates. Managing spread duration through single-name CDS or CDX index overlays protects credit portfolios from widening contagion.

📊 Credit Spread Price Sensitivity

ΔP / P ≈ - Spread_Duration × ΔCredit_Spread

If a high-yield bond with a 6-year spread duration suffers a 200 bps widening in credit spread, its market price drops by approx. 12%.

⚖️ Key Comparison at a Glance

Dimension	Interest Rate Duration (IR Duration)	Credit Spread Duration (Spread Duration)
Risk Factor	Sensitivity to shifts in the risk-free sovereign yield curve	Sensitivity to shifts in the corporate credit risk premium
US Treasuries	Full interest rate duration exposure	Zero spread duration (no default credit risk)
Floating Rate Notes (FRN)	Near zero (coupons reset periodically with benchmark)	Full spread duration equal to matching maturity corporate bonds

⚔️ Don't Mix These Up! (Head-to-Head Comparison)

VSContingent Convertible Bond

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💡 Crucial Difference: A CoCo bond is a hybrid capital instrument with loss-absorption write-down triggers, while spread duration is a universal sensitivity metric across all credit instruments.

📌 Practical Market & Real-World Example

In March 2020, as energy sector high-yield spreads surged from 500 bps to over 1,100 bps, high spread duration triggered violent 20%+ drawdowns across corporate bond funds despite emergency rate cuts.