The spread represents the premium the market requires for accepting the credit risk of a specific issuer. If a government bond maturing in three years yields 17% annually, while a corporate bond of the same maturity yields 21%, the spread is 400 basis points.
The spread's magnitude reflects the market's assessment of the probability of default and expected losses in case of default. It changes over time: widening spreads across the market indicate growing investor caution, while narrowing spreads indicate the opposite.
Comparison is valid only when maturity and currency match. The difference between yields of securities with different maturities reflects not credit quality but the shape of the yield curve, and interpreting it as a risk premium is incorrect.
Practical application is straightforward: the spread helps determine whether the additional yield compensates for the assumed risk. A premium of several dozen basis points for a bond from an issuer with significantly worse credit quality than the government typically indicates the security is overvalued, not that it is reliable.