What are two components of credit risk?
Default risk/probability and loss severity.
Expected loss formula
Default probability x loss severity given default
What two things widen yield risk spreads
Downgrade risk and market liquidity risk
What is the most common type of all corporate bonds outstanding?
Senior unsecured debt
What status is given to secured creditors if the value of their pledged property is less than the amount of their claim?
Senior unsecured debt
What is the highest non-investment grade rating?
Ba1 and BB+
What is a cross-default provision?
events of default on one bond trigger default on all outstanding debt.
What is notching with respect to credit agencies?
The credit rating of a particular issue can be moved up or down from the general rating of the issuer. The general rating is usually applied to its senior unsecured debt.
What are the two components of a bond's yield spread?
Liquidity premium and the credit spread
What effect will an improving credit cycle, stronger economic conditions, strong financial markets have on yield spreads?
They will all make the yield spread narrow.