what the heck is this new reading in Fixed Income? Please help me

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Jehanzaib Zafar

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Guys please help me with this new reading (reading 45) “credit analysis model”. The curriculum is way too cumbersome here and I just dont understand a word of it. Schweser does not do any well either.
Can someone be kind enough to tell me what should I be taking to the exam? can some one give me some pointers here which are easy to understand on Structural model, reduced form model and term structure of credit spreads.
I do not see any formulas here. Just theory; nebulus platitudes.
 
I felt the same way at first with that one, if I were you I would skip that one and read it after the options reading on the black scholes Merton model, it will make a lot more sense. At first the formulas looked completely foreign.
 
Read it and it was very difficult. i eventually understood what it was trying to get at but I’m still waiting for an Elan video on it to be released so I can have it explained again.
 
Start with understanding three things probability of default, loss given default and present value of loss given default. The latter is the basis for the price of debt insurance products
next understand structural models are akin to, two option strategies, they are from the 2 perspective the first being that of an equity holder…..who has a claim on asset values after debt is paid. The next is the debt holder who has a claim up to the value of the debt but if default occurs then the have a claim of the asset, whatever value they get. The loss to the debt holder is then debt-assets. The optionality flows from this…. Think about a call it is spot- strike or assets -debt if assets are below debt the value is zero….so the debt holder is effectively holding a risk less bond and has sold a Put to the equity holders….. Since selling a put forces the seller to take delivery, in this case the assets and sell them for whatever they can get…. The trigger is default. The problem with the structural model is all the assuming which makes it hard to apply but the foundation is set for you to move on to reduced form…..which is easier to apply to a company and easier to understand thanks to the simple equations provided……. What’s more important as stated by the Los is understand the pros and cons of each model which indludes credit ratings….. So if you’re feeling the pinch focus on theses items and you should be able to get in the 50- 70 should an item set on this material appear….. Which is a likely event
 
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