Credit spread (bond)

When you hear people say "credit spread," they are talking about a special kind of bond. A bond is like a fancy IOU that a company or government issues to borrow money. When you buy a bond, you are lending money to the issuer, and they promise to pay you back in the future with interest.

However, not all bonds are created equal. Some people and institutions are more likely to pay back their debts than others. For example, you might feel pretty confident lending money to the U.S. government because it is a huge, stable entity with lots of resources to draw upon. But you might be less sure about lending to a small startup company that has never borrowed money before.

A "credit spread" is a measure of how much more interest you can earn by lending money to someone who might be less likely to pay you back. If you buy a bond from a trustworthy issuer like the U.S. government, the interest rate might be pretty low because there is a low probability that the issuer won't pay you back. But if you buy a bond from a riskier issuer, like that startup company, the interest rate might be much higher to compensate you for the higher probability of default.

So, to sum up: a "credit spread" measures the difference in interest rates between a safe, stable borrower and a riskier, less certain borrower. By lending money to the riskier borrower, you can earn more interest, but you also take on more risk that they won't be able to pay you back.