Forward rates (F) function of expected future spot rates E(S). Theories of the Term Structure Pure (unbiased) expectations. yield spread = liquidity premium + credit spread Return impact of spread changes: return impact ≈ġ −duration ×∆spread + convexity × (∆spread )2 2 “Four Cs”: capacity, collateral, covenants, character. single manager funds.įixed Income Credit Analysis default risk = probability of default loss severity = loss given default = % lost expected loss = default risk × loss severity recovery rate = 1 – expected loss Corporate family rating (CFR): issuer.
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