Corporate Bonds vs G-Secs: Spread & Risk

What Are Government Securities and Why Are They the Benchmark?

Government Securities, commonly called G-Secs, are debt instruments issued by the Government of India to fund its fiscal deficit - the gap between what the government spends and what it collects as revenue. The RBI acts as the government's debt manager and conducts weekly auctions of these securities through the primary dealer system. Once issued, G-Secs trade on the NDS-OM (Negotiated Dealing System - Order Matching) platform for institutional participants and on stock exchanges for retail participants.

The defining characteristic of a G-Sec is its sovereign backing. The Government of India has never defaulted on a domestic currency obligation, which means the probability of non-payment of interest or principal is, for all practical purposes, treated as zero by market participants. This is not a legal guarantee in the way a bank fixed deposit is guaranteed up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC), but the economic reality is that a sovereign government issuing debt in its own currency can always instruct its central bank to create liquidity if needed - a backstop unavailable to any corporate borrower.

Because of this near-zero default risk, G-Sec yields serve as the risk-free rate in India. Every other yield in the fixed-income universe is anchored to this rate. A 10-year G-Sec yield - often referred to as the benchmark yield - is quoted constantly in financial media as a barometer of the overall interest rate environment. When you hear that the 10-year yield has risen to 7.2% or fallen to 6.8%, that movement cascades through the pricing of corporate bonds, bank lending rates, and even equity valuations.

G-Secs come in several forms. Dated securities (also called central government bonds) have fixed maturities ranging from a few years to 40 years, pay a fixed semi-annual coupon, and return the face value at maturity. Treasury bills (T-bills) are short-term instruments of 91, 182, or 364 days, issued at a discount and redeemed at face value. State Development Loans (SDLs) are similar instruments issued by state governments, backed by their respective state governments with implicit central support. Inflation-indexed bonds and floating-rate bonds exist as well, serving more specialised purposes.

For retail investors, the RBI Retail Direct scheme has been a game-changer, allowing individuals to open gilt accounts directly with the RBI and bid in primary auctions without going through a broker or a mutual fund. This democratisation of G-Sec access has made it possible to build a sovereign debt portfolio at low cost - an option that barely existed a decade ago.

The G-Sec yield curve - the graph of yields across different maturities - is a critical analytical tool. A normal upward-sloping curve, where longer maturities yield more than shorter ones, reflects expectations of higher future rates and the greater uncertainty of locking money for longer. When this curve inverts or flattens, it signals important shifts in monetary policy expectations and economic outlook. Understanding this curve is the first step in understanding why corporate bonds are priced the way they are.

What Are Corporate Bonds and How Are They Structured?

A corporate bond is a debt instrument issued by a company - public sector or private - to raise capital from investors. The issuing company promises to pay periodic interest (the coupon) and return the principal at maturity. In India, corporate bonds are regulated by SEBI, which has issued detailed regulations covering issuance, listing, credit rating, disclosure, and trading norms.

Corporate bonds must be listed on recognised stock exchanges like NSE or BSE if they are issued to more than 50 investors (the private placement route to qualified institutional buyers has different thresholds). SEBI mandates credit ratings from at least one SEBI-registered credit rating agency before a public issue. The major rating agencies in India - CRISIL, ICRA, CARE, India Ratings, and Brickwork Ratings - assign ratings on a scale from AAA (highest safety) through AA, A, BBB (investment grade) down to BB, B, C, and D (speculative or default grade). A rating of AAA means the agency believes the issuer has the highest capacity to service its debt obligations. Each notch down the ladder implies incrementally higher risk.

Corporate bonds can be structured in many ways. Some pay a fixed coupon semi-annually, mirroring G-Secs. Others pay a floating rate linked to an external benchmark - such as the RBI's repo rate or the Mumbai Interbank Offered Rate (MIBOR) - which adjusts periodically. Some bonds are secured by specific assets of the issuer (secured debentures), while others are unsecured (debentures backed only by the general creditworthiness of the issuer). Some carry a call option giving the issuer the right to redeem early (callable bonds); others carry a put option giving the investor the right to demand early repayment.

The maturity spectrum for corporate bonds in India is typically 1 to 10 years, though some infrastructure bonds and Basel III-compliant bank bonds can extend to 15 years or beyond. Shorter maturities are more common in the private placement market, where companies target institutional investors like insurance companies, mutual funds, and provident funds.

For retail investors, the accessibility of corporate bonds has improved markedly. SEBI's 2021 guidelines streamlined listing and trading of corporate bonds on exchanges. Bond platforms have also emerged, although investors should verify the regulatory status of any platform before transacting. The face value of listed corporate bonds has been reduced over time to lower the entry threshold, though many bonds still have a minimum lot size that makes them more suitable for high-net-worth individuals than small retail investors.

A key structural feature distinguishing corporate bonds from G-Secs is the role of trust deeds and debenture trustees. When a company issues secured debentures, a debenture trustee (a SEBI-registered entity) holds the security interest on behalf of bondholders. In the event of default, the trustee is supposed to enforce the security and distribute proceeds to bondholders. This mechanism exists specifically because corporate bonds carry default risk - a concept entirely absent from sovereign G-Secs.

Understanding the Credit Spread: The Core Concept

The credit spread is simply the difference in yield between a corporate bond and a G-Sec of comparable maturity. If a 10-year G-Sec yields 7.00% and a AAA-rated 10-year corporate bond yields 7.60%, the credit spread is 60 basis points (bps). One basis point equals 0.01%, so 60 bps equals 0.60%. This spread is the market's collective estimate of the additional compensation required to bear the risks of the corporate issuer instead of the sovereign.

Credit spreads are not static - they compress and widen continuously based on market conditions, the issuer's financial health, the broader economic cycle, and global risk sentiment. During benign credit conditions, when corporate balance sheets are healthy and defaults are rare, spreads narrow. During stress periods - financial crises, sharp economic slowdowns, or sector-specific stress events - spreads widen dramatically as investors demand more compensation for uncertainty.

In India, the credit spread has several distinct components, even if market participants often quote just a single number:

First, the pure credit risk premium reflects the statistical probability of default and the likely loss given default. A BBB-rated company has a historically higher default probability than a AAA-rated one, and that difference shows up in yields. Second, the liquidity premium compensates investors for the fact that corporate bonds - especially lower-rated or less frequently traded ones - are harder to sell quickly at a fair price compared to G-Secs, which have deep and continuous markets. Third, there is a term premium adjustment for differences in call or put options embedded in the bond. A callable corporate bond may offer a slightly wider headline spread, but part of that spread compensates for the optionality you have granted the issuer. Fourth, there can be sector-specific risk premia - infrastructure bonds, for example, carry project risk and regulatory risk beyond the financial health of the issuer.

Spread measurement in practice requires comparing bonds of equivalent duration, not just equivalent stated maturity, because bonds with different coupon structures have different effective interest rate sensitivities even at the same maturity date. This is why sophisticated analysts use option-adjusted spread (OAS) rather than a raw yield difference, though for basic retail-level analysis, the simple yield spread is a reasonable starting point.

The Indian corporate bond market has developed meaningful spread benchmarks over time. A AAA-rated NBFC bond in the 3-year segment has historically traded at spreads in the range of 50–100 bps over comparable G-Secs during normal conditions, with spreads spiking sharply during stress events such as the IL&FS credit crisis of 2018 and the COVID-19 disruption of 2020. AA-rated bonds typically carry an additional 30–80 bps on top of AAA spreads, and A-rated bonds can be anywhere from 100–250 bps wide of the AAA curve, depending on conditions.

Understanding the credit spread is not just about picking higher yields. It is about asking: is the extra yield commensurate with the extra risk? And that requires unpacking the risks of corporate bonds in detail.

How the RBI's Monetary Policy Affects Spreads and Prices

The RBI's Monetary Policy Committee (MPC) sets the policy repo rate - the rate at which the RBI lends overnight money to banks. This rate is the anchor of India's interest rate structure. When the MPC raises the repo rate to combat inflation, yields across the board - G-Sec yields, corporate bond yields, bank fixed deposit rates - tend to rise, and bond prices fall. When the MPC cuts the repo rate to stimulate growth, yields fall and bond prices rise.

However, the impact of monetary policy is not symmetric across G-Secs and corporate bonds, and this is where the analytical nuance lies.

When the MPC raises rates, G-Sec yields rise predictably in line with the rate hike cycle. Corporate bond yields also rise, but the spread itself may widen additionally if the reason for rate hikes is elevated inflation eroding corporate profitability, or if a tight liquidity environment makes it harder for companies to refinance debt. Conversely, during a rate-cutting cycle, G-Sec yields fall faster than corporate bond yields, causing spreads to compress. Corporate bonds benefit from the rate cut, but the primary beneficiary in terms of price appreciation is typically the G-Sec, because investors move to lock in sovereign yields before they fall further.

The RBI also manages system liquidity through open market operations (OMOs) - buying or selling G-Secs from its own portfolio. When the RBI buys G-Secs in the open market, it injects liquidity into the banking system and pushes G-Sec prices up (yields down). This directly benefits existing G-Sec holders. Corporate bond holders benefit more indirectly - as banks find themselves flush with liquidity, their appetite for higher-yielding corporate paper can increase, tightening spreads somewhat.

The RBI's Operation Twist - a simultaneous purchase of long-duration G-Secs and sale of short-duration G-Secs - was deployed in 2019–20 to flatten the yield curve and reduce long-term borrowing costs for the government. This policy affected the long end of the G-Sec curve directly and the long end of the corporate bond curve indirectly.

For retail investors, this monetary policy dynamic has a practical implication: during a rate-hiking cycle, short-duration corporate bonds (1–3 years) are relatively safer because their price sensitivity to rate changes is lower, and the higher credit spread provides a partial buffer. During a rate-cutting cycle, long-duration G-Secs tend to produce the largest capital gains, because they have the highest duration and the greatest price sensitivity to falling yields. Mixing both types strategically - depending on the rate cycle - is something sophisticated investors do, though timing monetary policy is never straightforward.

It is also worth noting that G-Sec yields are influenced by government borrowing plans announced in the Union Budget. If the government plans to borrow significantly more than the market expected, the increased supply of G-Secs pushes their prices down and yields up - a phenomenon sometimes called crowding out. A larger fiscal deficit financed by higher G-Sec issuance can push up the benchmark yield, which in turn raises corporate borrowing costs across the economy.

Credit Ratings in India: Reading the Signals Correctly

Credit ratings are the shorthand language of the corporate bond market. SEBI requires that all public issues of corporate bonds be rated by at least one SEBI-registered credit rating agency. For private placements above certain thresholds, similar requirements apply. The rating agencies assess the issuer's financial strength, cash flow stability, debt-service coverage, management quality, industry dynamics, and macro-economic sensitivity.

The rating scale in India runs from AAA (highest degree of safety) through AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- (investment grade) and then BB+, BB, BB-, B, C, and D (speculative or default grade). Many institutional investors - insurance companies, provident funds, and certain mutual fund schemes - are mandated by their respective regulators to invest only in investment-grade paper (BBB- and above), which creates a structural demand for bonds in that range.

Two important points often trip up retail investors. First, ratings are opinions, not guarantees. A AAA rating means the agency's analysts believe the issuer has the highest capacity to meet its obligations, based on information available at the time. The rating can be revised - sometimes with little warning - if the issuer's finances deteriorate or if new negative information emerges. India has seen instances of rapid multi-notch downgrades in stressed NBFC and infrastructure sectors that caught investors by surprise.

Second, ratings carry a time lag relative to market prices. Bond traders and sophisticated investors often detect signs of stress in an issuer before the rating agency formally downgrades it. The yield on a bond may widen noticeably in the secondary market - a signal worth watching even if the rating hasn't changed yet. If the traded yield on a bond you own is suddenly 200 bps wider than issuers of similar stated rating, that market signal is telling you something the formal rating may not yet reflect.

For practical portfolio construction, investors often use rating categories as a first filter. AAA-rated corporate bonds from reputable issuers are the closest substitutes to G-Secs in terms of credit quality, though even these carry some default risk, liquidity risk, and structural risks absent in sovereigns. AA-rated bonds offer meaningfully higher yields for a modest step up in risk. Moving below AA into single-A or BBB territory significantly raises the required due diligence burden and is generally considered more appropriate for investors with the expertise and risk tolerance for credit selection.

SEBI has also introduced a regulatory framework for online bond platforms (OBPs) to ensure that platforms offering listed bonds to retail investors meet minimum standards of disclosure and investor protection. Retail investors should verify that any platform they use is registered with SEBI as a stock broker or operates within a SEBI-compliant framework.

Finally, it is important to note that ratings from different agencies for the same instrument can sometimes differ - a situation called rating splits. When two agencies assign different ratings to the same bond, the market generally prices the bond closer to the lower rating. Investors should check ratings from multiple agencies where available and not rely on the highest rating given.

Taxation: A Critical Differentiator Often Overlooked

Taxation significantly affects the after-tax return comparison between G-Secs and corporate bonds, and the rules in India are nuanced enough to warrant a dedicated discussion.

Interest income from both G-Secs and corporate bonds is taxable in India. The coupon received is added to the investor's total income and taxed at the applicable income tax slab rate. For a high-income individual in the 30% tax bracket, a 7.60% coupon on a corporate bond translates to an after-tax yield of approximately 5.32% (ignoring surcharge and cess). The same arithmetic applies to G-Sec coupons. From a tax perspective on coupon income, G-Secs and corporate bonds are treated identically - both fully taxable as income from other sources.

Capital gains taxation is where the comparison becomes more interesting. If you sell a bond before maturity in the secondary market at a price higher than your purchase price, the gain is treated as a capital gain. The holding period and the applicable tax rate are governed by the Income Tax Act, and the specific provisions may change with each Finance Act. Investors should refer to the latest Finance Act and, where applicable, seek guidance from a tax professional rather than relying on rates quoted in any static educational document.

One historically relevant difference was the tax treatment of listed bonds versus unlisted bonds, and the distinction between short-term and long-term capital gains based on holding periods. The indexation benefit, which once applied to certain debt mutual funds, has seen changes in recent Finance Acts - another reason to stay current with the law.

For G-Secs specifically, there is a nuance worth noting: no TDS (Tax Deducted at Source) is deducted on interest earned from G-Secs held in demat form (as is the norm when accessed through the RBI Retail Direct scheme or through a broker). This can be administratively convenient, though the investor's obligation to declare and pay tax on the income remains. Corporate bond interest, by contrast, attracts TDS if the issuer is a company and the annual interest crosses a threshold - currently governed by Section 193 of the Income Tax Act, though thresholds may be revised. Investors should verify current TDS thresholds with a tax adviser.

For investors in lower tax brackets or those with HUF (Hindu Undivided Family) structures, the net returns from corporate bonds may be relatively more attractive compared to those in higher brackets, because the tax drag on the higher coupon is proportionally smaller.

The after-tax yield comparison is ultimately the most honest comparison between the two instruments. A corporate bond yielding 7.80% versus a G-Sec at 7.00% is an 80 bps gross spread. After accounting for taxes (if both are taxed at the same rate on coupon income), the after-tax spread is the same 80 bps. But if the corporate bond is harder to sell, carries some default risk, and has an embedded call feature that could reduce your actual return, that 80 bps spread may not be adequate compensation. Always consider the total risk-adjusted, after-tax return.

Spread Dynamics: When Spreads Widen and When They Compress

Understanding what drives spread movements is one of the most practically useful skills for a bond investor. Spreads are not random - they follow identifiable patterns linked to credit cycles, monetary policy, and market sentiment.

Credit cycle dynamics: Credit spreads are inherently cyclical. During economic expansions, corporate revenues are healthy, debt-service ratios are comfortable, and defaults are rare. In this environment, investors feel confident extending credit to corporations at relatively thin spreads - they do not need as much compensation because risk seems low. Spreads narrow. As the economic cycle peaks and turns, corporate profitability comes under pressure, refinancing conditions tighten, and the probability of defaults rises. Investors demand wider spreads. At the trough of the cycle, spreads are at their widest, offering the highest potential reward for investors willing to take credit risk - though this is also when risk is highest.

Monetary policy and liquidity: Tight monetary policy generally widens spreads for two reasons. First, higher benchmark rates make it more expensive for companies to refinance existing debt, increasing credit risk. Second, tighter liquidity reduces the appetite of institutional investors (banks, NBFCs) to hold corporate bonds, reducing demand and pushing prices down (yields up). Easy monetary policy does the opposite: flush liquidity encourages investors to move up the risk spectrum in search of yield, compressing spreads.

Sector-specific events: Indian credit markets have been shaped by several significant sector-specific stress events. The IL&FS default in 2018 - when one of India's largest infrastructure financing entities missed payments - caused widespread panic in the NBFC and infrastructure bond segments. Spreads in those segments widened sharply and remained elevated for extended periods. Investors who had bought NBFC paper assuming it was nearly as safe as sovereign debt found that assumption brutally tested.

The DHFL episode, the Vodafone Idea debt restructuring discussions, and stress in various real-estate-linked bonds demonstrated that credit events in India are not hypothetical risks. They happen, and when they do, the secondary market for affected bonds can become virtually illiquid - widening bid-ask spreads from a few basis points to hundreds of basis points overnight.

Global risk appetite: India's corporate bond market is not entirely insulated from global sentiment. When global risk aversion rises - as during the COVID-19 shock in March 2020 - foreign portfolio investors (FPIs) exit Indian debt markets, rupee depreciates, and domestic institutional investors become more cautious, all of which widen spreads. Conversely, when global risk appetite is strong and yields in developed markets are low, FPI inflows into Indian debt compress spreads.

Rating changes and corporate governance events: A single credit rating downgrade of a large issuer can trigger forced selling from institutional investors constrained by investment mandates (e.g., a mutual fund scheme that can only hold investment-grade paper must sell if a bond falls to BB). This forced selling can push prices down sharply in an illiquid market, widening spreads even for other issuers in the same sector as contagion concerns spread.

For retail investors tracking the bond market, monitoring the spread between AAA corporate bond yields and benchmark G-Sec yields is a useful barometer of overall credit conditions. Consistently narrow spreads may signal complacency, while sudden widening signals stress - each with different implications for how you should think about your existing holdings and any new investments.

Portfolio Construction: Blending G-Secs and Corporate Bonds

A well-constructed fixed-income portfolio does not have to choose exclusively between G-Secs and corporate bonds - the two can complement each other in important ways. The appropriate blend depends on your investment horizon, income requirements, tax situation, and most importantly, your genuine risk tolerance.

Start with your return objective and work backwards. If your primary goal is capital preservation - protecting rupee principal from default - G-Secs are the natural anchor. You know that if you hold a G-Sec to maturity, you will receive exactly the coupons and principal promised. There is no credit risk to stress over. This makes G-Secs particularly appropriate for goals like building a retirement corpus, funding a child's education in a known time frame, or preserving money set aside for a specific large expense.

If your goal includes generating a higher regular income stream and you are comfortable doing due diligence on credit quality, a portion of your fixed-income allocation can include high-quality (AAA or AA) corporate bonds. The additional spread - even after accounting for any liquidity premium and credit risk - can translate into meaningfully higher income over time, especially if reinvested efficiently.

Diversification within corporate bonds is crucial. Concentrating in a single issuer, sector, or maturity makes a portfolio vulnerable to a single credit event. Spreading across multiple issuers, industries, and maturities reduces the impact of any single adverse event. This is straightforward in theory but harder in practice for retail investors, because achieving adequate diversification requires significant capital when individual bond lot sizes are large.

Laddering is a time-tested strategy for managing interest rate risk. Instead of putting all your money into a single maturity - say, 10 years - you spread investments across multiple maturities: 2, 4, 6, 8, and 10 years, for example. As each rung of the ladder matures, you reinvest at current market rates. This approach smooths out the impact of interest rate fluctuations and ensures you always have some portion maturing in the near future, reducing liquidity constraints.

Duration management is another dimension. During phases when interest rates are expected to rise, reducing portfolio duration (moving to shorter maturities or floating-rate instruments) reduces price sensitivity to rising yields. When rates are expected to fall, extending duration can generate capital gains. G-Secs are generally preferred instruments for duration extension because their liquidity makes it easier to exit if your view turns out to be wrong.

For retail investors with limited capital, direct bond investing may not be the most efficient route due to lot sizes and the difficulty of achieving diversification. Bond mutual funds and Exchange-Traded Funds (ETFs) tracking government securities or corporate bond indices can provide exposure with lower capital requirements and built-in diversification. However, mutual fund investments involve their own considerations, including expense ratios, fund manager risk, and the fact that returns are not guaranteed. SEBI regulates mutual funds separately, and investors should read scheme information documents carefully before investing.

Finally, never ignore liquidity needs. Fixed-income instruments, especially corporate bonds, should be thought of primarily as buy-and-hold instruments. If you need to liquidate your holding before maturity in a stressed market, you may receive significantly less than the fair value.

Practical Due Diligence for Corporate Bond Investors

Buying a corporate bond requires more active due diligence than buying a G-Sec. The extra yield you earn is your compensation for doing this work - and for accepting the risk that remains even after doing it. Here is a structured approach to evaluating a corporate bond before committing capital.

Step 1 - Understand the issuer's business: What does the company do? How stable is its revenue base? Is it in a regulated industry (utilities, telecom) with predictable cash flows, or a cyclical industry (real estate, commodities) where revenues fluctuate widely? Regulated businesses with long-term contracts and government counterparties are generally more credit-stable than competitive, unregulated businesses.

Step 2 - Analyse financial ratios: Focus on debt-service coverage ratio (DSCR) - the ratio of operating cash flows to debt repayment obligations. A DSCR consistently above 1.5x suggests comfortable headroom. Also examine the debt-to-equity ratio, interest coverage ratio (EBIT divided by interest expense), and free cash flow generation. Compare these with industry peers and track their trend over multiple years - a deteriorating trend is a warning signal even if absolute levels still look acceptable.

Step 3 - Understand the bond's structure: Is the bond secured or unsecured? If secured, what assets back it, and are those assets of adequate value and liquidity? If there is a call option, on what terms and from what date? Are there any financial covenants - minimum ratios the company must maintain - and what happens if they are breached? Read the information memorandum or offer document carefully.

Step 4 - Assess the rating and the trajectory: What is the current rating, and what is the rating outlook (positive, stable, negative, or on watch)? Read the rating agency's most recent rationale - it provides insight into the agency's concerns and what developments might trigger a rating change. Check whether the bond has been rated by more than one agency and whether the ratings agree.

Step 5 - Check secondary market liquidity: Before buying, check the trading history of the bond on NSE or BSE. How frequently does it trade? What are the typical bid-ask spreads? A bond that trades infrequently with wide spreads is harder to exit. If you must sell before maturity, this illiquidity can result in a significant loss relative to the bond's theoretical fair value.

Step 6 - Compute the yield spread over the benchmark G-Sec: Calculate the actual spread you are earning over a G-Sec of comparable maturity. Compare this spread with historical norms and with spreads on similarly rated issuers. If the spread seems unusually narrow for the risks involved, the bond may not be offering adequate compensation. If the spread is unusually wide, understand why - the market may be seeing risks that the formal rating does not yet reflect, or there may be a genuine mispricing opportunity.

Step 7 - Factor in taxation and your personal tax situation: Compute the after-tax yield and compare it with after-tax G-Sec yields and bank FD rates. Ensure the additional complexity and risk of the corporate bond is genuinely rewarded in after-tax, after-risk terms.

This due diligence process takes time and requires access to financial statements, offer documents, and market data. Retail investors who lack the expertise or time for this process may find that investing in corporate bond mutual funds - where professional fund managers conduct this analysis - is a more appropriate approach.

Example

Key benefits

How it works

1. 1
   Identify the Benchmark G-Sec Yield

   Find the current yield of a G-Sec with a maturity matching the corporate bond you are evaluating. The 10-year G-Sec yield is widely published by the RBI and financial portals and serves as the primary benchmark.

2. 2
   Calculate the Corporate Bond's YTM

   Using the corporate bond's current market price, face value, coupon, and remaining maturity, compute the yield to maturity (YTM). This is the true annualised return if you hold the bond to maturity and reinvest all coupons at the same rate.

3. 3
   Compute the Raw Credit Spread

   Subtract the G-Sec YTM from the corporate bond YTM. The result, expressed in basis points, is the raw credit spread - the additional annual yield the market demands for the corporate bond's extra risks.

4. 4
   Decompose the Spread into Risk Components

   Assess how much of the spread reflects pure default risk (based on the credit rating), how much reflects liquidity risk (based on trading volumes and bid-ask spreads), and how much reflects structural features like call options.

5. 5
   Adjust for Taxation

   Apply your applicable income tax rate to both the G-Sec yield and the corporate bond yield to arrive at after-tax yields. The after-tax spread may differ from the pre-tax spread if different tax treatments apply.

6. 6
   Assess Whether the Spread Is Adequate

   Compare the spread with historical norms for similarly rated bonds, and with spreads on comparable issuers. A spread that is unusually narrow suggests the risk is underpriced; unusually wide could signal stress or opportunity.

7. 7
   Monitor Continuously After Investment

   Credit conditions change over time. Monitor the issuer's quarterly financial results, rating agency actions, and secondary market yield movements. If the bond's traded yield widens significantly beyond your entry spread, investigate the cause promptly.

Formula

Credit Spread (in bps) = YTM of Corporate Bond − YTM of Comparable Maturity G-Sec
After-Tax Yield = Pre-Tax YTM × (1 − Marginal Tax Rate)

Key takeaways

Frequently asked questions

Related terms