Isn’t downgrade risk just a type of credit spread risk (since downgrade is bad because it leads to credit spread…)?
It’s not. Credit spread risk is the risk of all corporate spreads increasing (not just the bond you are analysing). It’s a risk associated with the asset class as opposed to just one security.
Downgrade risk is the risk of being downgraded in credit ratings which is overall bad for CREDIT risk.
soddy1979 Wrote: ------------------------------------------------------- > It’s not. Credit spread risk is the risk of all > corporate spreads increasing (not just the bond > you are analysing). It’s a risk associated with > the asset class as opposed to just one security. Thank you! Not pertaining to the exam; Credit speard risk would has to do with overall interest rates, or expectation, or shift of habitats… What if analysts and investors began to shun a specific security without the official downgrade from moodys or sp, would we call that downgrade risk?
No. Credit ratings are worded into debt covenants and contracts ( particularly when collateral is posted or redeemed regularly) Contracts do not refer to some whims and fancies of the market in a given period
Credit spread risk is the risk of credit spreads on issues widening in the future. Downgrade risk is the posiib ility of a rating downgrade in the near or distant future. If I remember correctly in the short term it is termed a rating watch and the long term a rating outlook. Please advise