Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Fixed Income > Credit Analysis Models > Flashcards

Credit Analysis Models Flashcards

1
Q

Default risk

A

Likelihood of default event

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Default risk preimium

A

Reflects uncertainty in timing of default

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Credit Risk

A

Given Default, how much is likely to be lost?

L.G.D - Loss Given Default

LGD Formula = Expected Exposure X Loss sensitivity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Expected Exposure

A

The amount of money that could be lost in default without consdidering recovery

Example: 1 year 4% bond at par - EE = 104

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Recovery Rate

A

% of recovered in default

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Loss severity

A

1 - RR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Formula for Probability of Default (POD) at time n

A

(Probability of survival at n-1) x (Probability of default)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Formula for Expected loss

A

LGD x PODn

[EE(1-RR)] x [Pos n-1 x POD]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Credit analysis of securitized debt: Homogenity

A

THINK OF SIMILARITY

Degree to which the underlying debt characteristics are similar across individual obligations.

Homogenity: General concluion from the class.

Hetrogenity: Security on a loan by loan basis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Credit analysis of securitized debt: Granularity

A

Actual number of obligations in the structural security

Many: Conclusion based on summary statistics

Few: Analysis of each individual secuirty.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Credit analysis of securitized debt: Organation and Secuicing

A

Exposure to operational counterparty risk over the life of the securitized asset.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Credit analysis of securitized debt:
Structure of the secured debt transaction

A

SPV + Any strucutural enhancement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is Credit Scores?

A

Retail lending market
Ranks a borrowers credit riskiness from highest to lowest.

Does not provide estimate of a borrowers default probability.

It is called an ordinal ranking because it only orders borrowers riskiness from highest to lowest.

Does not depend on economic conditions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is Credit rating?

A

Wholesale lending market. Ranks credit risk of a company, government, or ABS.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Risk Neutral Probability

A

FV = [ND(1-P) + DxP] / 1+rfr

**Best way to conceieve Risk neutral probabilities of default **: The historical probability of default + premium for the uncertainty of the timing of default.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How to calculate expected return from credit migration

A

Expected rate of return due to credit migration

-ModDur x (New Credit spread - Old Credit Spread)

17
Q

Probability of default for year n

A

POS ^(n-1) x POD

18
Q

What is the relationship between credit spreads and benchmark spread in regards to each other and the business cycle.

A

Negative and Counter cyclical.

A stronger economic climate is generally associated with higher benchmark yields but lower credit spreads reflecting lower POD.

Credit spreads have a negative relastionship with benchmark rates - Contracting as rates ris and expanding as rates drop.

And Countercyclical with the business cycle - narrowing as the economy expands and widening as the economy contracts.

19
Q

A 3 year 10% annual corporate bond has a VND of 125.0193 and a CVA of 6.0389. What is the credit spread if the 3 year par rate is 1.5% ?

A

Step 1. VND - CVA = Present value of bond
125.0193 - 6.0389 = 118.9804

Type in the values in the calculator, solve for YTM

YTM = 3.2567

Credit spread = YTM - Par rate = 1.7567% = 176 Bsp

20
Q

How do we measure/determine the credit riskiness of a bond?

A

By calculating expected loss

LGD x POD

EE(1-rr) x POS^n-1 x POD

21
Q

Structure model, when does a company default?

A

Company defaults on its debt when the value of assets falls below the value of liability

22
Q

Formula for Loss Given Default

A

EE x (1-RR)

23
Q

What relationship does CVA have with change in interest rates?

A

Inverse relationship.

Increasing interest rates -> Lower CVA
Decreasing interest rates -> Higher CVA

Since rates tend to drop during a recession, all forward rates in the tree will be lower, leading to higher EE at each time node. Therefore LGD increases.

24
Q

Formula for CVA

A

LGD x POD x Discount Factor

LGD x POD / (1+R)^t

The CVA is the sum of the present value of expected losses on the bond

25
Q

Which is the best way to conceive of the Risk Neutral probability of Default

A

The Historical Probability of Default + Premium for the uncertainity of timing the default

Fixed Income (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions