Chapter 23 lecture slides

Chapter 23 lecture slides - Introduction To Credit...

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FINA 4082 Dr. Krause Introduction To Credit Derivatives Chapter 23
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What are you responsible for? Chapter 23 material Basics of credit risk Credit risk in four markets (high yield bonds, leveraged bank loans, sovereign market debt, distressed debt) Basics of credit derivatives Credit default swaps FINA 4082 Dr. Krause
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FINA 4082 Dr. Krause What are Credit Derivatives? Various Definitions Credit derivatives are financial instruments that seek to trade in credit risks for hedging and speculative purposes. Credit derivatives are financial instruments that are designed to transfer the credit exposure of an underlying asset or issuer between two or more parties. With credit derivatives, a financial manager can either acquire or hedge credit risk. Credit derivatives are simply the purchase of credit protection or insurance against unfavorable credit conditions.
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FINA 4082 Dr. Krause What are Derivatives? A financial contract that has its price derived from, and depending upon, the price of another underlying asset. The underlying assets might be traded (i.e. stocks or bonds) or these might be indices. Types of derivatives include Swaps, Options and Futures.
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Quick Introduction to Credit Default Swap (CDS) What is a Credit Default Swap (CDS) ? It is a financial agreement that swaps or transfers the credit exposure of a fixed income security between two parties. Credit Default Swap (CDS) Defined The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the asset. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments. The premium or price of the swap is denoted in basis points paid on par value. FINA 4082 Dr. Krause
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FINA 4082 Dr. Krause
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FINA 4082 Dr. Krause What is Credit Risk? The risk that a counterparty to a financial transaction will fail to fulfill their obligation. There are three sources of credit risk: 1. Default risk 2. Downgrade risk 3. Credit spread risk
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FINA 4082 Dr. Krause Default Risk Risk that the issuer of a bond or debtor of a bond will not repay the outstanding debt in full. Default risk can be complete or partial (some of the original debt will be recovered). Exhibit 23.1
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FINA 4082 Dr. Krause Default Risk - Bond Ratings
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FINA 4082 Dr. Krause Default Rates a Function of Macro-Economic Conditions
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Moody’s reported that the default rate on junk bonds had declined in December 2009 for the first time in 23 months, to 12.5% for high-yield debt issued worldwide, and forecasted that the rate would drop more sharply to 3.3% by the end of 2010. It is projected to be under 2% for 2011. FINA 4082
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Chapter 23 lecture slides - Introduction To Credit...

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