There are a multitude of indicators used in economic studies. Here we cite two that are commonly used.
The first measure is the difference between the interest rate at which a company borrows (the rate attached to a bond with a certain maturity) and the risk-free interest rate. What is this risk-free rate? That is a question in itself. To put it simply, we generally take the interest rate attached to government bonds, for example the rate attached to the German Bund.
A second measure is what is known as the CDS spread. Remember that a CDS is a contract that allows the buyer to be compensated in the event of a credit event on the underlying asset (default, non-payment of annuities, restructuring, etc.). The term « spread » refers to the difference between the price of a bond without a CDS and the price of the same bond with a CDS attached. Ultimately, it is simply the amount that the buyer of the CDS must pay to the counterparty wishing to guarantee it against a credit event. This amount is generally expressed in basis points relative to the annualized nominal value of the underlying product.
These two measures have similar variations, but are not necessarily exactly the same. The relative liquidity of each of the two products, supply effects, and counterparty risk relating to CDSs are factors (among others) that may cause movements unrelated to credit risk. More details are provided here.
Julien P.
