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Fixed Income - Credit Analysis

Terms in this set (50)

Credit Spread (Formula)
Corporate Bond YTM - Benchmark Bond YTM
G-Spread (General Idea)
form of credit spread where the government bond YTM is used as the benchmark bond YTM
Default Risk Premium
portion of the credit spread that reflects the regular default risk of a bond (probability of default) plus a premium for the uncertainty in timing of the default
Default Risk
the likelihood of an event of default (represented by the probability of default)
Credit Risk
given default, the amount that is likely to be lost
Expected Exposure
the total amount of money that could be lost in default without considering any recovery, which we represent with the present value of all remaining coupons and principal
Solving for Expected Exposure of Risky Coupon Paying Bond at Time N - Calculator Steps
N = Total Number of Periods - N, I/Y = Risk-Free Bond Yield, PMT = Coupon Amount, FV = Par Value, CPT PV then get Expected Exposure = PV + One Additional Coupon
Recovery Rate
the percentage of a bond's value an investor will receive if the issuer defaults
Loss Severity (Formula)
1 - Recovery Rate
Loss Given Default (Formula)
Expected Exposure * Loss Severity
Risk-Neutral Probability of Default (General Idea)
method of calculating probability of default by discounting the default versus no-default outcomes using the risk-free rate
Recovery (Formula)
Expected Exposure * Recovery Rate
Expected Loss (Formula)
Exposure Loss Severity POD
Probability of Default (POD) at time t (Formula)
[(1 - Starting POD)^(t - 1)] * Original POD
PV of Expected Loss (Formula)
Expected Loss / (1 + r)^t
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