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.

Principal ($)

Annual Rate (%)

Years

Compounding / Year

$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How It Works

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

Each component has a specific meaning:

Standard CDS pricing model — The standard cds pricing model recorded for the scenario being assessed.
Accounting — The accounting recorded for the scenario being assessed.

Note: Interpret the cds credit spread result against the thresholds and context described above.

How to Use

Enter the standard CDS pricing model, accounting for the scenario you are assessing. 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 cds credit spread result to inform your calculation.

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