This linear approximation estimates the impact of changing credit spreads on bond prices. Note the negative relationship: rising spreads (worsening credit) reduce bond prices.
Spread Duration measures the approximate percentage change in a bond's price for a 1% (100 basis point) change in its credit spread, assuming Treasury rates remain constant.
It isolates the credit risk component of a bond. If a company announces bad earnings and its bonds are perceived as riskier, the spread widens, and the price falls. Spread Duration tells you exactly how much.
Rate Duration vs. Spread Duration
Most traders just say "Duration." This usually refers to Interest Rate Duration (sensitivity to government yields).
Interest Rate Duration
Sensitivity to the risk-free rate (e.g., Fed Funds, Treasuries).
Driven by: Inflation, monetary policy.
Spread Duration
Sensitivity to the extra yield (spread) demanded for credit risk.
For standard fixed-rate corporate bonds, Rate Duration and Spread Duration are typically equal. However, for Floating Rate Notes (FRNs), Rate Duration is near-zero, but Spread Duration can be high.
Analyzing the Output
The relationship is negative:
Spreads Widen (Increase): Perceived risk goes up. Bond price FALLS.
Spreads Tighten (Decrease): Perceived risk goes down. Bond price RISES.
If you own High Yield bonds, you are "Short Spreads" (you profit when spreads fall/tighten).
Real World Example
Investment Grade Bond (IBM): Might have a duration of 8 years. If spreads widen by 10bps (0.10%), the price drops by approximately 0.8%.
Junk Bond (Distressed): Might have a duration of 4 years. If spreads widen by 100bps (1.00%) due to recession fears, the price drops by 4%. The impact of spread movement is often the dominant driver of returns for junk bonds.
Frequently Asked Questions
Expert answers on Credit Risk
Is Spread Duration the same as Modified Duration?
For fixed-rate bonds, they are numerically almost identical. However, functionally they measure different risks (Rates vs Credit). For floating rate notes, they are very different.
Does this calculator measure default loss?
No. It measures the mark-to-market price loss if the market perceives higher risk. Actual default (where price goes to recovery value) is an extreme event not captured linearly by duration.
What is "OAS"?
Option-Adjusted Spread. It is the best spread measure to use for calculation because it strips out the value of any call/put options embedded in the bond.
Why would spreads widen?
Spreads widen due to deteriorating economic data, sector-specific news (e.g., oil price crash for energy bonds), or issuer-specific bad news (e.g., failed merger).
Can Spread Duration be negative?
Rarely. Some obscure derivatives (Interest Only strips) might have negative duration properties, but for standard bonds, it is positive (meaning price falls when spread rises).
How do I interpret "CS01"?
CS01 (Credit Spread 01) is the dollar value change for a 1 basis point change in spreads. It is simply: Spread Duration × Portfolio Value × 0.0001.
Do government bonds have Spread Duration?
Technically no, as they are the risk-free benchmark. However, "Swap Spreads" or sovereign credit spreads (for non-US countries) do exist.
What is "DTS"?
Duration Times Spread. It is a newer risk metric that suggests volatility is proportional to the spread level. Used heavily in High Yield portfolio management.
Understanding the risk of "safe" bonds
Even "safe" investment grade bonds can drop significantly in value if their spread widens, proportional to their duration.
Summary
The Credit Spread Duration Calculator isolates the impact of credit risk on your bond portfolio.
Use it to stress-test your portfolio against widening spreads during economic downturns.
Understanding this sensitivity is key to avoiding unexpected losses in "safe" corporate bond funds.
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Estimate price change from a credit spread move using spread duration and clean price.
How to use Credit Spread Duration Calculator
Step-by-step guide to using the Credit Spread Duration Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Credit Spread Duration Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Credit Spread Duration Calculator is designed to be user-friendly and provide instant calculations.
Is the Credit Spread Duration Calculator free to use?
Yes, the Credit Spread Duration Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Credit Spread Duration Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Credit Spread Duration Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.