CFA L1 55 - Credit Analysis

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.