FIN30021 Fixed Income and Debts Markets Week - 5 Module 5 Question 1 Explain whether you agree or disagree with the following statement: "The credit risk of a bond is the risk that the issuer will fail to meet its obligations to make timely payment interest and principal" Question 2 In addition to credit ratings, what other information is provided by rating agencies that investors can use to gauge the credit risk of an issuer? Question 3 How do long-term credit ratings differ from short-term credit ratings? Question 4 Why is the analysis of covenants important in credit analysis? Question 5 What is a negative covenant? Question 6 What is the notching process? Question 7 What is the probability of default in a risk neutral environment if the recovery rate is 40%, the bond has 1 year to maturity the final cashflow is $105 and current price is $100 and the risk free rate is 2%? Question 8 An analyst believes that the credit risk on a 4-year, 6% annual payment corporate bond can be expressed by an annual probability of default 3% and a recovery rate of 45%. Given that the government yield curve is flat at 2%, calculate the credit spread and credit valuation adjustment for the bond?