1
$\begingroup$

I am trying to figure out how to quantify the change in price on a bond for a change in credit risk. I'm not even sure how to quantify a change in credit risk, but I'm thinking possibly something related to either the debt/equity rating of a corporate bond or a change in the credit rating. If there is a better way, please do include it in your answer.

So, my question is how to determine the price change from a change in the credit risk for a bond? Is there a way to quantify this in any remotely accurate way? If so, how?

Would simple duration/convexity do the trick?

Thanks.

Improve this question
$\endgroup$
1
  • 1
    $\begingroup$ How about looking at the company's credit spread? $\endgroup$ – Egodym Jul 11 '16 at 14:26
2
$\begingroup$

If there is a CDS on the bond, that might be a good indicator to use, esp. if you want to compare one against another.

Improve this answer
$\endgroup$
1
$\begingroup$

What you're looking for looks to be more in the realm of a mathematical model (specific to the company's size, available liquidity, and industry). Credit Risk Pricing Models may provide a decent overview of how to build such a model.

Unfortunately duration/convexity will only help you capture the interest rate risk on your bonds, and not any of the idiosyncratic events such as credit downgrades.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.