Bond Spread Calculator (Yield Spread & Implied Default Risk)
Calculate a bond’s yield spread over government bonds in basis points and the default probability it implies, given an expected recovery rate — useful for corporate bonds and country risk spreads.
How it works
Spread = bond yield − government yield; in basis points × 100 · implied annual default probability ≈ spread ÷ (1 − recovery rate) · probability of default by maturity = 1 − (1 − annual probability)ᵀ
A bond’s yield spread is the extra yield it pays over a government bond of the same maturity, quoted in basis points (1 bp = 0.01%). It compensates mainly for default risk, plus liquidity and other premiums. Dividing the spread by the expected loss in default (1 − recovery) gives the credit-triangle estimate of the market-implied annual default probability used by credit analysts and CDS traders. Country risk indices such as JPMorgan’s EMBI spread (“riesgo país”) apply the same idea to sovereign dollar bonds of emerging markets.
Worked example
A 5-year corporate bond yielding 6.5% against a 4.2% government bond has a spread of 2.30 percentage points, or 230 bp — a range typical of BB credit. With 40% recovery the implied annual default probability is 2.30% ÷ 0.60 = 3.83%, and the chance of default before maturity is 1 − (1 − 0.0383)⁵ = 17.75%.
Sources: Wikipedia — Yield spread · Wikipedia — Credit spread (bond)
Frequently asked questions
How do you calculate a bond spread?
Subtract the yield of a government bond with the same maturity from the bond’s yield, then multiply by 100 to express it in basis points. 6.5% − 4.2% = 2.30 percentage points = 230 bp.
How is the default probability derived from the spread?
With the credit triangle: spread ≈ probability of default × loss given default. Dividing a 2.30% spread by a 60% loss (40% recovery) gives about 3.83% a year. It is a risk-neutral estimate and usually higher than historical default rates because spreads also include risk and liquidity premiums.
What is a good spread?
High-grade (A and above) corporate bonds often trade within about 100 bp of government bonds, BBB around 100–200 bp, high-yield bonds several hundred bp, and spreads above 1,000 bp signal distress.
What is the country risk premium (riesgo país)?
It is the spread of a country’s US-dollar government bonds over US Treasuries, usually measured by the EMBI index. A spread of 500 bp means the country pays 5 percentage points more than the US government.
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Educational estimate, not investment advice. Returns, defaults, rates and exchange rates are uncertain and past results do not guarantee future ones — consider independent professional advice before investing.