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Estimating issuer-specific risk for corporate bonds
Jan 1, 2010
In this article we measure the issuer-specific risk of corporate bonds using the CreditGrades model. Expected losses on corporate bonds are calculated using the CreditGrades cumulative default distribution function. A better estimate of expected losses allows for a better estimate of total risk, because we can express the price of a corporate bond as its risk-free value minus expected losses. We also use our issue-specific risk framework to decompose the total risk of a bond into risk-free and credit spread components. By using the DataMetrics corporate credit curves, we can further decompose the credit spread component into credit/sector spread and issuer-specific spread components.
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