Credit Derivatives: Trading, Investing and Risk Management, Second Edition

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Credit Debt and Other Traditional Credit Instruments

The reader is assumed to be familiar with government bonds, with the LIBOR market and to have had some familiarity with traditional credit instruments (bonds and loans). The following sections briefly review these areas and develop some techniques for the analysis of credit risk - particularly in relation to credit portfolios.

1.1 BONDS AND LOANS; LIBOR RATES AND SWAPS; ‘REPO’ AND GENERAL COLLATERAL RATES

1.1.1 Bonds and Loans

A bond (Bloomberg definition) is a certificate of debt issued by a government or corporation with the promise to pay back the principal amount as well as interest by a specified future date. A loan is a broader concept than a bond - it is a sum of money lent at interest. In practice bonds are usually traded instruments (at least in principle) whereas loans are often private agreements between two or more parties (usually a corporate entity and a bank). There has been a growing market recently in syndicated loans as opposed to bilateral loans. Traditionally loans have been bilateral agreements between the borrower (typically a corporate entity) and a lender (typically a bank but often a private individual) the terms of which can be very varied including various options and restrictions on the borrower’s use of the money or financial performance. A syndicated loan is offered by a group of lenders (a ‘syndicate’) who work together to provide funds for a single borrower and share the risk - unlike ...