PPT Slide
Terms structures of credit spreads
• Downward-sloping for highly leveraged firms.
• Humped shape for medium leveraged firms.
• Upward-sloping for low leveraged firms.
• For high-quality bonds, credit spreads widen as maturity increases
since the upside potential is limited and the downside risk is
Most banking regulations do not recognize the term structure of credit
spreads. When allocating capital to cover potential defaults and credit
downgrades, a one-year risky bond is treated the same as a ten-year