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The prices vary because different assumptions are used for volatility,
call rules may differ, or different benchmark interest rates.
Basically, a company defaults on its debt if the value of the assets of the company falls below a certain default point.
Modified assumes that when interest rates change, the cash flows do
not change. For "effective", cash flows could change. Note formulas are
the same.
1. Monitoring costs - costs incurred to monitor or restrict actions of
actions.2. Bonding costs - costs incurred by agents to assure
prinicipal they are acting in their best interest.3. Residual loss -
costs incurred even after monitoring and bonding costs are implemented.
Directly models the probability of default or downgrade. Default and
recovery process are modeled independently and are independent of each
other.
Nominal and Zero-Volatility (Z spread) reflect compensation for credit
risk, liquidity risk, and option risk. OAS only credit and liquidity
for both Treasure and Sector benchmarks. Take off credit risk on all for
Issuer bench.
score used to predict a corporate bankruptcy; less than 1.81 indicate
serious credit problems while excess of 3.0 indicate a healthy firm.
Managers (agents) represent owners (principals). Agent should act in
best interest of the principal, but sometimes act their own self
interest.
Convention in swap market is to quote the swap spread over a benchmark rather than a certain rate at a certain maturity.
No matter how complex model, when each on-the-run issue for a
benchmark security is valued using the model, the value produced should
be equal to the on-the-run market price.
1. costs are influenced by changes in interest rates2. Bank debt is
short term, and must be repaid quickly so where does money come from?
operating CF, refinancing, or sale of assets.3. Bank debt holders have
priority over other debt holders
Date at which debt was issued
Strategic direction, financial philosophy, conservatism, track record, succession planning, and control systems
Note where coupon changes over the life of the bond. To value, just adjust the cash flow according to the step-up coupon rate.
Servicer is just there to collect cash flows; no need to actively manage the collateral to get cash flow.
Using a pool of loans or receivables as collateral for a security; can be used as funding source for generating liquidity
Downgrade watch - down 2 levelsUpgrade watch - up 2 levelsNegative
outlook - down 1 levelStable outlook - keep currentPositive outlook - up
1 level
Affirmiative or postivive covenants call upon the debtor to make
promises to do certain things.Negative covenents are those which require
the borrower not to take certain actions.
The coupon rate for floaters is set at the beginning of the period but
paid at the end, so the coupon interest is paid in arrears. You would
have to adjust binomial model for it. Also, have to note the "cap" on
interest rate and use it.
1. Compensation tied to performance2. Granting significant equity
interest in company3. Internal corporate control systems that help make
timely decisions (ex. timely removal of CEO)
Convenent which requires ratio of earnings available for interest or
fixed charges to be a certain minimum on each reporting date.
Help companies pay for debt; strongest forms are contractually binding
and do not include a provision for that permits the lender to refuse to
provide funds.
Covenent that places restrictions on debt ratios which limits companies from taking on additional debt.
