Fixed Income – Credit Risk

Increasingly, agents and investors in fixed income have set their sights beyond the traditional government bond markets towards the more lucrative returns available when credit risk is allied to interest rate risk. In recent years, developments have led to the emergence of credit as a truly independent asset class, with its own derivative markets and idiosyncrasies. As involvement has grown, investors have become more sophisticated, and analysis and products have become more complex.


This course extends the analysis of risks facing fixed income investors beyond merely interest rate risk, and into the sphere of credit risk. It describes the credit characteristics of differing forms of debt issuance, market evaluation of credit risk, and the roles of rating agencies in the credit universe.


    On completion of this course, you will be able to:

    Describe how the credit exposure on some bonds affects their return characteristics relative to 'riskless' debt

    Explain how credit seniority and simple covenants affect the credit risk of an issue

    Explain how market prices give an indication of credit evaluation

    Outline the roles, methodologies, and challenges faced by the major rating agencies

    Describe how credit has evolved into a distinct asset class


    Topic 1: Credit Exposure

    What is Credit Exposure?

    o Derivative Credit Exposure

    Probability of Default

    Recovery Rate and Loss Given Default

    Expected Loss

    Topic 2: Ranking & Risk

    Questions of Seniority

    o Secured vs. Unsecured Debt

    o Senior Vs Junior Debt

    Provisions & Covenants

    Other Forms of Credit Enhancement

    o Guarantors

    o Monoline Insurers

    Recovery Rates

    o Seniority

    o Industry & Geography

    Topic 3: Credit Spreads and Evaluation

    Compensation for Risk


    o Relative to Government Securities

    o Relative to Interest Rate Swaps

    Types of Spread

    o Simple Yield to Maturity Comparisons

    o Zero-Volatility Spread (Z-Spread)

    o Option Adjusted Spreads (OAS)

    o Asset Swap Spreads

    o Spread on Floating Rate Notes (FRN)

    Credit Triangle

    Estimating a Default Probability

    Credit Evaluation Models and Drawbacks


    Topic 4: Rating Agencies

    Short-cuts in Credit Analysis

    o Name Recognition

    o Credit Ratings

    Rating Tables

    Why Ratings change and Do They Work?

    Ratings & Prices

    Rating Upgrades and Downgrades

    Rating Agencies

    o Credit Risk Not Market Risk

    o Challenges

    Conflicts of Interest

    Analysis Outside the ‘Comfort Zone’

    Regulation of Agencies

    Topic 5: Credit as an Asset Class

    Credit Derivatives

    Spread Equivalents



    90 Minutes

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