Floating-fixed credit spreads

We examine the term structure of yield spreads between floating-rate and fi xed-rate notes of the same credit quality and maturity. Floating-fixed spre ads are theoretically characterized in some practical cases and quantified in a simple model in terms of maturity, credit quality yield volatility yie ld-spread volatility, correlation between changes in yield spreads and defa ult-free yields, and other determining variables. We show that if the issue r's default risk is risk-neutrality independent of interest rates, the sign of floating-fixed spreads is determined by the term structure of the risk- free forward rate.