FI - R21 Fixed Income Active Management: Credit Strategies Flashcards
Credit Risk
The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment.
1) Default risk
2) Loss severity (LGD)
Credit Risk - Default risk
The probability that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest, according to the terms of the debt security
Credit Risk - LGD
The amount of loss if a default occurs
Credit loss rate
It represents the percentage of par value lost to default for a group of bonds. The credit loss rate is equal to the bond’s default rate multiplied by the loss severity.
Because loss severity <=100%, the credit loss rate is <= the default rate.
Spread Duration
It measures the sensitivity of a portfolio to changes in credit spreads.
Important for IG Corp Bond.
Empirical Duration
a measure of IR sensitivity that is determined from market data.
Benchmark speard
To substract the yield on a security with little or no credit risk (benchmark bond) from the yield on a credit security with a similar duration.
The problem with benchmark spread is the potential maturity mismatch between the credit security and the benchmark bond.
G spread
the benchmark bond is government bond.
key advantage of the G spread - it is easy to calculate and understand, and different investors usually calculate it the same way.
Zero Spread
the yield spread that must be added to each point of the implied spot yield curve to make the PV of the bond’s cash flows equal its current market price
OAS
It is the constant spread that when added to all the one period forward rates on the interest rate tree, makes the arbitrage free value of the bond equal to its market price.
Excess return
The return of a bond after interest rate risk has been hedged
Spread curve
It is the fitted curve of credit spreads for each bond of an issuer plotted against either the maturity or duration of each of those bonds.
Tail Risk
There are more actual events in the tail of a probability distribution than probability models would predict.
Structured Products
They are securities that are supported (backed) by collateral or pools of assets, and in turn repackage risks.
Covered Bond
It is a debt obligation issued by a financial institutional, usually a bank, and backed by a segregated pool of assets called a “covered pool”)
In the event of default, bond holders have resource against both the financial institutional and the assets in the covered pool.
Because of this dual protection for creditors, covered bonds usually carry lower credit risks and offer lower yields than otherwise similar corporate bonds or ABS.
