Credit Risk

Free CFA Level I lesson in Fixed Income. 11 min read, ~1,638 words.

Expected loss = POD × LGD, where LGD = 1 − Recovery Rate. Both are estimates, not observables. Investment grade is BBB−/Baa3 and above; speculative ("high yield" or "junk") is BB+/Ba1 and below. The three NRSROs are S&P, Moody's, and Fitch. Ratings are issuer-paid, lag the market, and address credit...