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CREDIT STRATEGIES (Credit Analisys: 5 Cs (Covenants - restrictions,…
CREDIT STRATEGIES
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Risk Exposures
Spread risk: decline in price relative to risk free bonds, due to spread widening
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Lower risk free: higher spread (bad economic conditions - higher default risk Higher risk free: lower spread (good economic conditions - lower default risk
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Liquidity Risk: hability to buy/sell quickly and at near fair market value. Bid/Ask spread is wider for HY. Regulatory and risk management greater for HY.
Spread Measures
Z-Spread
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A single spread is added to implied initial spot curve, to discount the cash flow and result in the current market value
OAS-Spread
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A single spread is added to each node of the interest tree, to discount the cash flow and result in the current market value
For a potfolio, consider the value weighted average of OAS
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Excess Return (XR) = (spread x time) - (Δspread x Duration(spread)) - (time x prob. default x loss severity)
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