Suppose Company X is AA company and it issues $100 bond at LIBOR + 20. And invest the $100 in BB bond which has yield of LIBOR + 50. So Company X make 30bps by taking credit risk. If company X want to do this synthetically, company X can enter into CDS contract by writing protection on the BB bond. My question is that the premium company X will recieve from CDS is 50bps or 50bps-20 bps=30bps? In other word, if company Y's rating is AAA who can borrow at LIBOR + 5, when company Y write protection on same BB bond (LIBOR+50), is the CDS premium Y receive will be 45bps?I tends to believe that the CDS premium is about the same of the credit spread, not the net spread between underlying and protecton seller. So, to replicate the strategy of issue $100 at AA and invest in BB, company x needs to write protection on BB and buy protection on its own bond(AA). So that the cash strategy is exactly replicated. Is this correct?Wondering

Anyone can help me on this? Thanks in advance.Wondering

First thing...relating credit spreads with CDS premium though very obvious, the argument does not really provide any value. Credit spread does not solely consist of default risk but also includes..liquidity risk premium + market(systematic) risk premium...Secondly...as i understand..ur logic of thinking of CDS spreads as net of the credit spread is not really logical cause then if two parties have same rating there will be no CDS premium at all...though this argument can be looked at when credit spreads consist of nothing bt default risk and the CDS pricing includes counterparty default risk (i.e. the risk of protection seller defaulting)