Fundamentals of Credit Analysis

Question 1

The key components of credit risk are ________ and _______ in the event of default. The product of the two is expected loss.

Answer 1

risk of default, loss severity

Question 2

Bonds rated _____ by Moody’s and ________ by Standard & Poor’s
(S&P)

Answer 2

Aaa to Baa3, AAA to BBB–

Question 3

The “4 Cs” of credit—_________—provide a useful framework for evaluating credit risk

Answer 3

capacity, collateral, covenants, and character

Question 4

Credit curves—the plot of yield spreads for a given bond issuer across the yield
curve—are typically _____ sloping, with the exception of high premium priced bonds and distressed bonds

Answer 4

upward

Question 5

Price impact ≈

Answer 5

–(MDur × ΔSpread) + ½Cvx × (ΔSpread)^2

Question 6

In assessing sovereign credit risk, a helpful framework is to focus on five broad
areas:

Answer 6

(1) institutional effectiveness and political risks, (2) economic structure and growth prospects, (3) external liquidity and international investment
position, (4) fiscal performance, flexibility, and debt burden, and (5) monetary
flexibility.

Question 7

____________ bonds are backed by the taxing authority of the issuing non-sovereign government.

Answer 7

General obligation (GO)