CFA L1 / FI / M14. Credit Risk
Module 14 · Fixed Income

Credit Risk

EN: Default probability, recovery, expected loss, credit migration.
VN: Xác suất vỡ nợ, recovery, tổn thất kỳ vọng, chuyển hạng tín dụng.

1. Expected Loss Core

About: EL = POD × LGD × EAD. Foundation of all credit-risk modeling. Each component has its own model — POD from credit ratings, LGD from recovery rates, EAD from exposure modeling.Tóm tắt: EL = POD × LGD × EAD. Nền tảng credit-risk. Mỗi thành phần có model riêng.
\[ EL = POD \times LGD \times EAD \]

Components

  • POD Probability of default.
  • LGD Loss given default = 1 − Recovery rate.
  • EAD Exposure at default.

2. Recovery Rate by Seniority Concept

About: Senior secured ~60–80%, senior unsecured ~40–50%, subordinated ~20–30%, equity ~0%. Drives LGD across capital structure.Tóm tắt: Senior secured 60-80%, unsecured 40-50%, subordinated 20-30%, equity ~0%.

Typical recovery rates

  • Senior secured 60–80%.
  • Senior unsecured 40–50%.
  • Subordinated 20–30%.
  • Equity Often near 0%.

3. Yield Spread Components Core

About: Yield = Risk-free + Liquidity premium + Credit spread. Decomposing the spread tells you how much of the yield premium compensates for credit risk specifically.Tóm tắt: Yield = Risk-free + liquidity + credit spread. Phân rã cho thấy phí credit thực.
\[ \text{Yield} = \text{Risk-free} + \text{Liquidity premium} + \text{Credit spread} \]
Practice problem

Risk-free 3.5%, liquidity premium 0.3%, credit spread 1.7%. Total bond yield?

Show solution
= 3.5 + 0.3 + 1.7
Yield = 5.5%

4. Credit Rating Categories Concept

About: Investment grade (≥BBB−/Baa3) vs high-yield. Ratings drive insurance regs, pension allocation, ETF eligibility. Notching adjusts for issue-specific seniority.Tóm tắt: IG vs HY. Ratings ảnh hưởng quy định bảo hiểm, pension, ETF. Notching điều chỉnh seniority.

Three agencies

  • Investment grade AAA/Aaa to BBB−/Baa3.
  • High-yield BB+/Ba1 to D.
  • D Default.

"Notching" = adjustment up or down based on issue specifics (seniority, security).

Practice problem Practice

Practice problem

POD = 3%, recovery rate = 40%, exposure at default = $10M. Compute expected loss.

Show solution
LGD = 1 − 0.40 = 0.60
EL = 0.03 × 0.60 × 10,000,000
EL = $180,000