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9.9 Analysis of corporate debt

The credit risk measures used for corporate or sovereign bonds can also be applied in Asset-backed Securities

  • Probability of loss – In ABS, the probability of default does not apply, so it is replaced by the probability of loss.
  • Expected loss
  • Present value of the expected loss To calculate these measures, a model analogous to those used for corporate and sovereign debt is used.

However, the calculations are much more complex

  • With respect to the credit ratings of ABS, the credit-rating agencies use the same rating scale as that used for corporate and sovereign debt, although the fact that they are structured debt is always noted.
  • Given the complexity of ABS, the use of the same credit rating scales may be inappropriate.

Lesson Wrap-Up

This lesson should leave you able to explain the analysis of corporate debt in a fixed-income context and connect it to the decisions made by issuers, investors, or analysts.

Review Prompts

  1. Explain analysis of corporate debt in your own words.
  2. State one exam-style risk, valuation, or market implication of the analysis of corporate debt.