Module 4
Corporate bonds & credit spreads
A government bond is (assumed) risk-free. A company might not pay you back — so its bonds must offer extra yieldto compensate. That extra yield over the risk-free curve is the credit spread, and the cleanest way to measure it is the Z-spread: the single constant amount you add to every point on the risk-free curve to make the bond's model price equal its market price. A wider spread means the market sees more risk.
Two more tools professionals use daily:
- CS01 (spread DV01) — the dollar gain or loss if the spread moves 1 basis point. It's your credit risk in dollars, just like DV01 is your rate risk.
- Carry & roll-down — your return if nothing changes: the coupon income you collect (carry) plus the price gain from the bond “rolling down” to a shorter, lower-yield point on the curve. It's why traders say they “get paid to wait.”
Drop the market price below the risk-free price and watch the spread appear.
🎛 Spread explorer
Z-spread
124 bp
over the risk-free curve
CS01 ($/bp)
$4,341
P&L per 1bp of spread
Risk-free price
103.54
if it had no credit risk
Carry & roll-down
Carry (income)
+5.61%
Roll-down
+0.63%
Total return
+6.24%
The Z-spread is the constant extra yield over the risk-free curve that reprices the bond to its market price — your compensation for credit risk. CS01 is what you make or lose per 1bp of spread move. Carry & rollis your return if nothing changes: coupon income plus the price gain from rolling down the curve. Educational tool — not investment advice.
Things to try
- • Lower the market price — the Z-spread widens. That's what happens when a company's risk rises.
- • Raise the maturity — CS01 grows, because a longer bond is more sensitive to the same spread move.
- • Extend the horizon — see carry & roll compound. A steep curve makes roll-down bigger.