The formula to calculate the Credit Spread is:
\[ \text{Credit Spread} = \text{Corporate Bond Yield} - \text{Government Bond Yield} \]
The credit spread is the difference in yield between a corporate bond and a government bond of similar maturity. It reflects the additional yield that investors demand for taking on the higher risk of the corporate bond compared to the government bond.
Let's assume the following:
Step 1: Determine the yield to maturity of the corporate bond:
The corporate bond yield is 5.3%.
Step 2: Determine the yield to maturity of the government bond:
The government bond yield is 1.8%.
Step 3: Calculate the credit spread:
\[ \text{Credit Spread} = 5.3\% - 1.8\% = 3.5\% = 350 \text{ basis points} \]
Therefore, the credit spread is 3.5% or 350 basis points.