DESCRIPTION

Theoretically, the changes in yield spreads between risky and risk-free bonds should reflect changing expectations in the likelihood of loss from default, which is determined by variability in the probability of default and expected recovery. Credit spreads reflect the specific nature of an obligation. For instance, secured debt generally has higher credit quality than subordinated debt of the same issuer. Credit spreads also reflect the financial condition of the issuer, the issuer’s industry and the issuer’s home country. This course provides a comprehensive introduction to credit spreads and optimizing the manner in which risk is taken.

TARGET AUDIENCE

• Participants from various areas of the institution whose work entails support of professionals involved in credit analysis or credit risk management.

OBJECTIVES

• Describe the economic process that occurs when a borrower defaults
• Define the term structure of credit spreads and why it exists
• Identify the factors influencing credit spreads
• Define the market approaches to calculating credit spreads
• Calculate the credit spread for a credit risky bond, given a set of assumptions
• Outline a bank’s approach to credit risk management
• Identify areas of the bank involved in credit risk management and their responsibilities
• Define the ways in which a bank limits the risks in traded assets
• Define the variables used to establish the various risk limits

PREREQUISITES REQUIRED

Participants should be comfortable working with numbers and performing simple calculations.