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Credit risk is one of the largest risks banks have. In this module learn about credit spreads, recovery rates and default probabilities.

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Course Summary

Credit spreads menuCredit spreads the triangleCredit spreads the market

Credit spreads - recovery ratesCredit spreads default probabilityCredit spreads default and recovery

  • 45 minutes
  • 8 question multiple choice
  • What credit spreads, recovery rates and default probabilities are
  • How these three things are closely related
  • How implied credit spreads can be calculated
  • How implied default rates can be calculated
  • What influences credit spreads and default rates
  • The practical application to your credit exposures

Credit spreads - the details

1. Credit spreads, recovery rates and default probabilities

  • What a credit spread is
  • The market for credit risk
  • Credit default swap prices
  • Recovery rates, defined, historic data, loss given default
  • Default probability, defined, historic data

2. The credit spread

  • Using default probabilities and recovery rates to imply credit spreads
  • Example using probability of survival and probability of default
  • How recovery rates affect credit spreads
  • How default probabilities affect credit spreads
  • Why the implied credit spread and the market price of credit can differ

3. The default probability

  • Using credit spreads and recovery rates to calculate default probability
  • Example the expected loss for a portfolio
  • How credit spreads affect the expected loss
  • How recovery rates affect the expected loss
  • What credit spreads imply about losses
  • What this means for financial institutions

4. Summary

5. Test

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