How does a CDS spread relate to default probability?

Simplified: annual default probability ≈ CDS spread / (1 - recovery rate). If CDS spread is 200 bps and recovery rate is 40%, annual default probability ≈ 200 / (1 - 0.40) = 3.33%. This is a risk-neutral probability that includes risk premium and liquidity, not a physical probability.

When does the CDS-bond basis become significantly negative?

Negative CDS-bond basis (bond spread exceeds CDS spread) occurs during funding crises when bonds cheapen due to forced selling while CDS remain at fundamental value. The 2008 crisis created negative basis of 200–400 bps for investment-grade bonds, an arbitrage opportunity for funded investors.

Credit Spread from CDS Premium

Convert CDS par spread to implied bond credit spread using the standard CDS pricing model, accounting for the difference between CDS premium (running) and bond yield spread over the risk-free rate.

Use the full interactive calculator below, or

Related Calculators

Z-Spread

Finance Long-tail

TED Spread

Finance Long-tail

Credit Spread from CDS Premium

Related Calculators

Frequently Asked Questions

How does a CDS spread relate to default probability?

When does the CDS-bond basis become significantly negative?