{"id":3484,"date":"2019-09-06T12:00:00","date_gmt":"2019-09-06T12:00:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=3484"},"modified":"2025-12-30T11:18:18","modified_gmt":"2025-12-30T11:18:18","slug":"credit-risk-corporate-bonds","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/credit-risk-corporate-bonds\/","title":{"rendered":"Credit Risk in Corporate Bonds"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Fundamentals of Credit Analysis (2025 Level I CFA\u00ae Exam \u2013 Fixed Income \u2013 Module 6)\",\n  \"description\": \"This video lesson covers credit analysis for corporate bonds in the CFA Level I curriculum. It explores credit risk components like default probability and loss severity, seniority rankings in bankruptcy, credit ratings and notching, risks of relying on agencies, the four Cs of credit analysis, key financial ratios, yield spread drivers, and special credit considerations.\",\n  \"uploadDate\": \"2022-06-02T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/zSl9z7qQB00\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=zSl9z7qQB00\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/zSl9z7qQB00\",\n  \"duration\": \"PT41M06S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following best describes a bond\u2019s credit risk?\",\n    \"text\": \"Which of the following best describes a bond\u2019s credit risk?\\n\\n1. Default probability inherent in fixed\u2011rate instruments.\\n2. The risk of not getting full interest and principal payments.\\n3. Expected loss in the event of failure or bankruptcy of a debt issuer.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"2. The risk of not getting full interest and principal payments.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"1. Default probability inherent in fixed\u2011rate instruments.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"3. Expected loss in the event of failure or bankruptcy of a debt issuer.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/zSl9z7qQB00?si=pIKKJV6MQ4J5ScuJ\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>Debt markets play a critical role in the global economy. Companies and governments raise capital in the debt market to fund recurrent expenditures, buy equipment, acquire assets, and so on. As such, bond markets facilitate economic growth.<\/p>\n<p>Credit risk is the risk of loss resulting from a borrower\u2019s failure to make full and timely payments of interest and\/or principal. In most instances, the investment will only suffer a partial loss, and bondholders will recover some value. Finance professionals call this the loss-given default (LGD). It is usually expressed as a percentage estimate of the bond position held by the investors.<\/p>\n<h2><strong>Credit-related Risks<\/strong><\/h2>\n<h3><strong>Spread Risk<\/strong><\/h3>\n<p>Risky debt instruments typically trade at a yield premium or spread to bonds considered \u201cdefault-risk free,\u201d such as US treasury bonds or German government bonds. Yield spreads in basis points would increase depending on 2 primary factors:<\/p>\n<ul>\n<li>downgrade risk; and\/or<\/li>\n<li>market liquidity risk.<\/li>\n<\/ul>\n<h3><strong>Credit Migration Risk (or Downgrade Risk)<\/strong><\/h3>\n<p>A decline in an issuer\u2019s creditworthiness often means that a rating agency has downgraded a bond issuer from, let\u2019s say, AA to A. The consequences of this migration are a higher risk of default and widening yield spreads.<\/p>\n<h3><strong>Market Liquidity Risk<\/strong><\/h3>\n<p>In a liquid market, selling large amounts of securities quickly will not significantly reduce the price. However, in a relatively illiquid market, such as the corporate bond market, selling many assets quickly will increase the bid-ask spread (not to be confused with the yield spread).<\/p>\n<p>The bid-ask spread is often indicative of market liquidity risk. Therefore, to compensate for the risk of insufficient market liquidity, the yield premium includes a market liquidity component in addition to the credit risk component.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>Which of the following <em>best<\/em> describes a bond\u2019s credit risk?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>Default probability inherent in fixed-rate instruments.<\/li>\n<li>The risk of not getting full interest and principal payments.<\/li>\n<li>Expected loss in the event of failure or bankruptcy of a debt issuer.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B<\/strong>.<\/p>\n<p>Credit risk is the risk of default on a debt that may arise from a borrower&#8217;s failure to make required payments.<\/p>\n<\/blockquote>\n\n","protected":false},"excerpt":{"rendered":"<p>Debt markets play a critical role in the global economy. Companies and governments raise capital in the debt market to fund recurrent expenditures, buy equipment, acquire assets, and so on. As such, bond markets facilitate economic growth. Credit risk is&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-3484","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Credit Risk in Corporate Bonds | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn about credit risk in corporate bonds, including credit migration risk, default probability, and factors affecting bond ratings.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/credit-risk-corporate-bonds\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Credit Risk in Corporate Bonds | CFA Level 1 - 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