CFA CFA Level 2 credit analysis model

credit analysis model

  • This topic has 4 replies, 3 voices, and was last updated Sep-18 by googs1484.
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  • nfonseca
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    Can someone explain this section in an easy way? Tough to understand

    googs1484
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    Tough section to explain in an easy way over this forum. you are referring to structural versus reduced form models I assume?

    Sarah
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    @nfonseca 
    It is much easier to answer a focused question than providing a general explanation. 

    nfonseca
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    just an overview of the models:
    structural – view as en euro call (if company performs well the owners will exercise the option of keeping it in business and will repay debt), all assets trade, use of calibration
    reduce – some of company debt trades, historical estimation, analyze bond measuring the business cycle (key fact)
    ABS – differs from credit ratings (which this section seems not to like too much) bc there is no probability of default as an ABS cant literally default

    what other important concept am i missing?

    googs1484
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    This how rationalize țhem in one sentence each.  Structural- determine credit spread via “option” pricing mechanisms; stock holders long a call and debt holders short a put. Reduced- prices credit spread based off bond mechansims; present value of expected losses. 

    I could add things like business cycle affecting credit spreads which is absolutely relevant for cyclical exposed firms, like you said. 

    That’s just how I look at it.  Can’t tell ya if that’s right ha ha but I hope so!

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