What does 'credit spread' measure?

The concept of "credit spread" specifically refers to the yield difference between a corporate bond and a risk-free government bond. This measure is crucial in the fixed-income market as it reflects the additional risk investors take on when purchasing corporate bonds compared to government bonds, which are often considered free of default risk.

The credit spread compensates investors for various risks associated with corporate bonds, such as credit risk (the risk that the issuer may default) and liquidity risk (the risk associated with the ease of buying or selling the bond). A wider spread indicates a higher perceived risk of default, while a narrower spread suggests that the market views the issuer as less risky.

This specific interpretation highlights the relationship between yield, risk, and the evaluation of corporate financial health, making it an important concept in financial economics. The other choices address different concepts that do not capture the essence of credit spread directly.