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Fixed IncomeModule 5 of 5

Credit Risk and Credit Analysis

5

Concepts

3

Formulas

1

Decisions

3

Quiz Questions

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Key Concepts

5 concepts covered in this module.

Credit Risk Components

Default risk (probability of default), Loss severity (loss given default), Recovery rate (1 - loss severity). Expected loss = PD × LGD.

Credit Spread

Yield premium over risk-free rate for credit risk. Wider spread = higher perceived risk. Spreads widen in economic downturns.

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Formulas

3 essential formulas for this module.

Expected Loss

EL = PD × LGD × EAD

Where: PD = probability of default, LGD = loss given default, EAD = exposure at default

Loss Given Default

LGD = 1 - Recovery Rate

Where: Percentage of exposure lost

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Decision Frameworks

1 decision frameworks to guide your analysis.

Investment grade vs High yield?

  • IG: lower default risk, lower yield, suitable for conservative portfolios
  • HY: higher yield for accepting more default risk, less sensitive to rate changes, more to credit cycle

Mind Map

Visual overview of how concepts connect in this module.

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Flashcard

Credit Risk Components

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Answer
Default risk (probability of default), Loss severity (loss given default), Recovery rate (1 - loss severity). Expected loss = PD × LGD.
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