Adding 75 bp to the default bond's all-in yield moves its hypothetical value from $956.24 to $924.88. The -3.2792% price change assumes every contractual payment remains intact; it is not an expected default loss.
Write down what the scenario changes
Use the five-year, 4% coupon, $1,000 face bond with semiannual payments. Its starting all-in nominal yield is 5%. For this case only, describe that assumption as a 3.5% reference yield plus a 1.5 percentage-point spread. This is a constructed flat-yield decomposition, not a fitted curve, an observed issuer spread or an option-adjusted spread.
Keep the reference yield unchanged and widen the assumed spread by 75 basis points, from 1.5 to 2.25 percentage points. The resulting all-in yield is 5.75%. The calculator receives only the all-in yield and its change. It does not independently identify which part came from rates, credit, liquidity or another pricing influence.
Keep the payment schedule fixed
The instrument still pays $20 every half-year and $1,000 principal alongside the final coupon. Each of those ten payments is discounted using 5.75% divided by two per period. The resulting value is $924.8823150475, compared with the original $956.2396803451. The immediate dollar change is -$31.3573652976.
Relative to initial value, that is -3.2792369886%. There is no missed coupon, reduced principal or delayed recovery payment anywhere in the schedule. Calling this number a default loss would therefore introduce an economic interpretation that the calculation has not modeled. The result is a discount-rate sensitivity under an unchanged-payment assumption.
Use the derivative with the correct variable
Baseline modified duration is 4.4580563244. Applied to a 0.0075 change in the annual yield, it estimates a -3.3435422433% price move. Adding the convexity term gives -3.2783079654%, about +0.000929 percentage points above the exact result. These calculations share the same cash flows and baseline yield.
In this restricted setup, a change in the scalar spread passes one-for-one into the scalar all-in yield, so the local yield sensitivity also describes that chosen spread input. This does not establish that modified duration and spread duration are interchangeable for all instruments. Different curves, optional cash flows or definitions of spread can change the relationship.
Explain why spread is not default probability
A spread quotation is not a probability input in this worksheet. There is no recovery rate, default time distribution, survival curve or risk-premium calibration. Dividing the assumed spread by an arbitrary loss-given-default number would create an additional credit model with assumptions that are absent from the tool.
For a credit review, retain distinct questions: which payments are promised, what scenarios could change them, what compensation the market appears to demand, and what can actually be traded. A scenario can use a larger yield without claiming to have answered all of these questions. That narrower statement is more reproducible than assigning a precise probability to an uncalibrated spread.
Avoid a hidden double-counting step
An analyst might be tempted to discount the full promised cash flows at the stressed all-in yield and then subtract a separate expected loss. That combination needs a coherent valuation framework. Without one, the credit adjustment may be represented twice or mixed with an incompatible pricing measure. This example deliberately performs neither that extra deduction nor a probabilistic credit valuation.
A scenario that changes payment amounts should be maintained as a separate calculation with its own timing and recovery assumptions. It cannot be reproduced merely by typing a wider shock into the unchanged-cash-flow calculator. Naming that boundary helps a reviewer understand both what the current result demonstrates and what additional work would be required.
Keep trading frictions outside the arithmetic
The $924.88 value is a model output, not a dealer's bid. No bid-ask spread, accrued interest, minimum denomination or market impact has been applied. A holder attempting to sell would need actual executable terms. Comparing a hypothetical mid-style value to an executable bid without explaining the distinction can make an apparent model discrepancy that is really a transaction-convention difference.
The case also keeps time fixed. It does not include carry earned over a month, the passage toward maturity or reinvestment of coupons. Those effects belong to a holding-period scenario with a defined start and end date. A pure spread shock should not quietly accumulate income while its reported denominator remains the initial price.
Retain a usable review record
Record the starting all-in yield, the assumed reference-plus-spread decomposition, the unchanged reference rate and the 75-basis-point widening. Save exact repricing beside duration and convexity estimates. The downloaded scenario can then be checked by discounting each payment independently. Label the result as an immediate sensitivity, and leave credit suitability or a buy decision to a separate documented process.
Review checkpoints
- A spread shock is not a default probability.
- The unchanged payment schedule is a material assumption.
- Executable sale terms and model value are different records.
Primary references
Continue the calculation
Credit Spread Is Not a Default Probability
Separate a benchmark-relative yield difference from expected loss, recovery assumptions and the risk of an actual payment failure.
Spread Duration: Sensitivity Without a Default Forecast
Convert spread changes into first-order value estimates while preserving benchmark assumptions, basis-point units and the distinction from default loss.
Liquidity and Transaction Costs: From Model Value to Usable Cash
Distinguish theoretical valuation from transaction proceeds, label cost allowances and avoid treating a recent price as guaranteed execution.
Edition dated 16 October 2026. Constructed examples illustrate a method, not a current market price or a recommendation.