spreads going up: credit risk or market risk?

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hala_madrid

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if overall interest rates stay constant, and the price of your bond goes down because its spread above treasuries goes up… is that market risk, or credit risk?
thx
 
market risk.
I believe that credit risk is the risk that the person who bought the bond won’t get their payments or their original money back.
 
If interest rates don’t change and the spread inceases, I’d say it would be because of a change in credit spreads. It would have been market risk if the spread widened due to a change in interest rates.
 
Strikershank,
Credit spreads could also change because a of a change in perception towards macroeconomic risk or sector-specific risk.
 
Analyse this - i agree that you defined credit spread risk which if What_madrid meant was credit spread risk instead of what he wrote (credit risk) then i want to change my answer to match yours.
Otherwise, i think based on the wording (credit risk) that the situation described is market risk (the risk assocaited with changing security prices due to whatever)…
CFAI defined market risk: the risk associated with interest rates, exchange rates, stock prices [bond prices?], and commodity prices.
CFAI defined credit risk: is the risk of loss caused by a counterparty or debtor’s failure to make a promised payment.
 
not credit risk. this one’s market risk unless Madrid meant to write credit spread risk.’
the defintiion of credit risk means by process of elimination that the answer can’t be credit risk.
 
strikershank,
that is my point: cfa text does not mention “credit spread risk”, but “credit risk”
it is more difficult, because in the text, they say “the lines between credit risk and market risk have blurred as market for credit derivatives…”, and starts talking about credit spreads and the ability to hedge with OTC derivatives…
to be honest, if something like this is in the exam, I don´t know what I would pick market risk or credit risk… perhaps credit risk
thx
 
CFAI has a definition for creadit spread risk: the risk that the spread between the rate for a risky bond and the rate for a default free bond may vary after purchase….
So the example you posted is a clear cut case of credit SPREAD risk…except that wasn’t a choice, so again, by definition of credit risk (not spread risk) process of elimination leaves the answer as market risk.
 
Does the CFAI curriculum explicitly make a distinction between credit risk and credit spread risk? I thought that credit risk was reflected in credit spreads and the two are related.
 
i looked it up - and presented all three definitions in this thread. So yes, CFAatl. the CFAI does make a distinction….
 
can you tell us the book and page, please?
thx for your help strikershank
 
Actually when they discuss how to deal (transfer) with credit risk they include credit spread options, which would indicate to me that what they meant in this case is credit spread risk. I doubt that they’ll try to trick you one way or another based on one word though, that’s not their style ( more like Schweser style).
 
here, at madrid, it is currently 00:39 at night, friday, and I am reviewing this… I am already tricked :)
 
It’s 3:44 P.M in Lala land .. I’m still working on that monster QBank .. just can’t finish it ..
 
the credit spread risk is related to the credit-worthiness of the underlying issuer. It varies as the credit perception of the issuer varies. So, shouldn’t it be credit risk?
Market risk would be related to changes in stock prices, currencies, commodities & interest rates- which this isn’t.
 
market risk. not credit risk. but i’m done arguing this - four posts and getting nowhere.
as for the page numbers for the three definitions - use the glossary in teh back of the book. volume 4 & 5.
 
As per CFAI readings, there are three types of credit risk:
1- Default risk 2- Credit spread risk and 3- Downgrade risk
They define credit spred risk as the risk that the spread between the rate of risky bond and the rate for a default risk-free bond may change after the purchase.
So I would chooce credit risk.
The above info is part of FI reading29 p.23 Volume 4.
The gerenal deifintion for credit risk in risk management reading noted by strikershank above is not in contradict with the above classification but it is merely apply to default risk in my opinion.
 
for the last time - the CFAI defines credit risk, credit spread risk and market risk.
This question is creadit spread risk, HOWEVER that wasn’t originally an option we could pick from. We had to choose between credit risk and market risk. SINCE the answer can’t be credit risk it has to be market risk. CFA exam rule #3 (cant’ be #1) don’t put an answr that fits a question that wasn’t asked. The answer to this question CAN’T be credit risk because there is no risk that was made apparent of a counterparty defaulting.
CFAI defined credit risk: is the risk of loss caused by a counterparty or debtor’s failure to make a promised payment.
CFAI definition for creadit spread risk: the risk that the spread between the rate for a risky bond and the rate for a default free bond may vary after purchase.
CFAI defined market risk: the risk associated with interest rates, exchange rates, stock prices [bond prices?], and commodity prices.
 
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