--- title: "Credit Spread | Altss Glossary" description: "A credit spread is the extra yield or margin a lender or bond investor earns over a benchmark rate for bearing a borrower's credit and liquidity risk,…" canonical: "https://altss.com/glossary/credit-spread" --- Glossary · Underwriting metric # Credit Spread Also called: spread over treasuries A credit spread is the extra yield or margin a lender or bond investor earns over a benchmark rate for bearing a borrower's credit and liquidity risk, usually quoted in basis points. Publisher: Altss LLCPublished 2026-01-06Content modified 2026-10-01 ALTSS-CREDIT-054 A government bond and a company's bond of the same maturity pay different yields because the company might not pay in full. The difference is the credit spread. Floating-rate loans quote it directly as a margin over a base rate such as the Secured Overnight Financing Rate (SOFR). Wider spreads mean the market is asking for more compensation for default and illiquidity. ## Formula ### Nominal spread (G-spread) ``` G-spread = bond yield − government bond yield interpolated to the same maturity ``` `y_bond` yield to maturity (or to worst) of the credit instrument `y_gov(T)` government yield at the same maturity, interpolated from the curve Other measures use other benchmarks. I-spread is measured over the swap curve. Z-spread is the constant spread over the zero-coupon curve that prices the bond. OAS is the Z-spread net of the value of embedded options. Floating-rate loans use the quoted margin and the discount margin, which reflects the price paid. ## What a spread pays for A credit spread compensates for: - **expected loss**: probability of default × loss given default; - **a credit risk premium**: investors demand more than expected loss because defaults cluster in bad times; - **a liquidity premium**; - **for private loans, an origination and complexity premium.** Decomposing the spread this way shows why a wider spread is not automatically better value: it may simply reflect higher expected losses. ## Spread measures - **Bonds**: G-spread, I-spread, Z-spread and option-adjusted spread (OAS). - **Floating-rate loans**: the contractual [margin](https://altss.com/glossary/spread-margin) over the base rate, the discount margin (the spread that equates projected cash flows to the price, so it captures original issue discount (OID) and price), and spread to an assumed three-year takeout. When comparing a fixed-rate bond with a floating-rate loan, convert both to the same basis, for example the bond's spread over the swap curve against the loan's discount margin. ## Private vs public spreads Private credit loans are usually quoted as a margin over [SOFR](https://altss.com/glossary/sofr-secured-overnight-financing-rate), with OID and fees on top. The gap between private-loan and broadly syndicated loan margins is often called an illiquidity premium. Part of that gap reflects smaller, more levered borrowers and tighter documentation, so it is not all compensation for illiquidity. Like-for-like comparison needs matched leverage, size and terms. ## Spreads and yields move differently Total yield = base rate + spread. When base rates rise, yields on floating-rate loans rise even if spreads tighten. LPs looking at a strategy's yield should separate the base-rate contribution, which they could earn in cash, from the spread, which is the compensation for credit risk. ## Worked examples ### Illustrative bond spread A five-year corporate bond yields 7.10% and the interpolated five-year Treasury yields 4.05%. The G-spread is 7.10% − 4.05% = 3.05%, or **305 basis points**. Suppose investors expect an annual default probability of 2% and a 40% loss given default. Expected loss is about 0.80% a year, so about 225 bp of the spread pays for risk and liquidity premia beyond expected loss. ### Loan margin A private loan pays Term SOFR + 5.50% with a 0.75% floor. Term SOFR fixes at 4.30%, above the floor, so the coupon is **9.80%**. The quoted credit spread is the 550 bp margin. The lender's full spread also includes any OID and fees, which are captured by the discount margin or all-in yield. Examples are illustrative; figures are not market data. ## Not the same as - [Loan Margin](https://altss.com/glossary/spread-margin): The loan margin is the contractual spread written in the credit agreement. Credit spread is the broader market concept that covers bonds and loans. - All-In Yield: All-in yield adds the base rate, OID and fees to the margin. The spread excludes the base rate. - [Default Risk](https://altss.com/glossary/default-risk): Default risk is the probability of non-payment. The spread is the price the market charges for it and for other risks. ## Common mistakes - Comparing a loan's margin with a bond's G-spread without converting both to a common benchmark. - Ignoring OID and fees when comparing private-loan spreads. - Treating the whole private-versus-syndicated spread gap as an illiquidity premium. - Reading higher yields as wider spreads when the base rate has risen. ## Edge cases - Near default, bonds trade on expected recovery rather than spread, and spread measures become unstable. - Callable bonds need OAS. A Z-spread overstates the compensation because part of it pays for the issuer's call option. ## Sources - [Secured Overnight Financing Rate Data](https://www.newyorkfed.org/markets/reference-rates/sofr). Federal Reserve Bank of New York, Published each business day (accessed 2026-10-01). Status: current (checked 2026-10-01). Rate description — supports: SOFR as a broad measure of the cost of borrowing cash overnight collateralised by Treasury securities, published each business day - [Private Credit: Characteristics and Risks](https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-characteristics-and-risks-20240223.html). Fang Cai; Sharjil Haque, Board of Governors of the Federal Reserve System (FEDS Notes), 23 February 2024. Status: Published (checked 2026-10-01). Characteristics section — supports: Private credit loans are mostly floating rate ## Related terms 4 terms - [Loan Margin](https://altss.com/glossary/spread-margin) - [Secured Overnight Financing Rate](https://altss.com/glossary/sofr-secured-overnight-financing-rate) - [Original Issue Discount](https://altss.com/glossary/oid-original-issue-discount) - [Default Risk](https://altss.com/glossary/default-risk) ## Concept record Concept ID ALTSS-CREDIT-054 Classification Underwriting metric · Risk Topics Private credit Version 2.0.0 Last reviewed 2026-10-01 Structured data [JSON](https://altss.com/reference/concepts/credit-spread.json) ## Canonical URL https://altss.com/glossary/credit-spread