Credit Analysis Models Flashcards

1
Q

Default risk

A

Likelihood of default event

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2
Q

Default risk preimium

A

Reflects uncertainty in timing of default

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3
Q

Credit Risk

A

Given Default, how much is likely to be lost?

L.G.D - Loss Given Default

LGD Formula = Expected Exposure * Loss sensitivity

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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

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5
Q

Recovery Rate

A

% of recovered in default

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6
Q

Loss sensitivty

A

1 - RR

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7
Q

Formula for Probability of Default (POD) at time n

A

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

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8
Q

Formula for Expected loss

A

LGD x PODn

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

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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

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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.

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11
Q

Credit analysis of securitized debt: Organation and Secuicing

A

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

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12
Q

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

A

SPV + Any strucutural enhancement

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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

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14
Q

What is Credit rating?

A

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

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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.

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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.