FinancialMarketsChap20

FinancialMarketsChap20 - Chapter 20 Key Points #1:...

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Chapter 20 Key Points #1: Corporate debt obligations expose an investor to credit risk – or risk that the borrower will fail to satisfy the terms of the obligations with respect to the timely payment of interest and the amount borrowed. This is different from treasury securities, that have no credit risk, because the government will not default, at least not yet… Credit risk consists of: o Default Risk : Risk that the borrower will fail to satisfy the terms of the obligations with respect to the timely payment of interest and the amount borrowed o Credit Spread Risk : The risk that an issuer’s debt obligation will decline in value due to an increase in the credit spread (amount of bps must pay above the treasury) o Downgrade Risk : Credit rating agencies issue ratings on various debt obligations. Should a debt obligation receive a lower grade, this will increase the credit spread sought by the market, and reduce the price of the issue or the issuer’s debt obligation. Credit risk is typically measured by the credit or quality ratings assigned by nationally recognized commercial rating companies. Commercial rating companies play a key role in the functioning of debt markets in the United States, and their role in other countries is increasing. -
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This note was uploaded on 01/27/2010 for the course ECON 252 taught by Professor Robertshiller during the Spring '08 term at Yale.

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FinancialMarketsChap20 - Chapter 20 Key Points #1:...

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