What does spread duration refer to?

Spread duration specifically measures the sensitivity of a bond's price to changes in credit spreads over and above any changes in interest rates. When the spread widens, it typically indicates an increase in the risk premium demanded by investors, which can lead to a decrease in the bond's price. Conversely, if the spread narrows, the bond's price generally increases as the perceived risk diminishes.

Understanding spread duration is particularly important for fixed-income investors, as it helps assess how much a bond's price may change in response to changes in market perceptions regarding credit risk rather than changes in interest rates themselves. The concept is crucial in risk management and portfolio management, as it gives insight into how sensitive a portfolio of bonds might be to credit risk changes, allowing for better strategic decisions regarding buying or selling bonds based on anticipated market movements.

The other choices do not capture the essence of spread duration: they either address different aspects of bonds (like interest rate duration), focus solely on a single bond's characteristics, or refer to price volatility rather than sensitivity to changes in spreads specifically.