Credit Risk (Default Risk)

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Chapters in this video

  1. 0:00 What credit risk means for bond investors
  2. 1:13 Rating agencies and the BBB-minus/Baa3 floor
  3. 3:42 Ranking security types from safest to junk
  4. 4:46 The ETN versus ETF credit risk trap
  5. 5:51 How downgrade risk attacks bond prices
  6. 7:12 Rapid-fire exam recap

What this video covers

  • Why credit risk (default risk) is strictly a bond risk, and why equities face business risk and market risk instead
  • How Moody's, Standard & Poor's (S&P), and Fitch rate bonds from AAA/Aaa down to D or C, and what those letters mean
  • The exact dividing line at BBB-/Baa3 that separates investment-grade bonds from high-yield (junk) bonds
  • Why U.S. Treasuries and Government National Mortgage Association (GNMA) bonds carry zero credit risk, while Fannie Mae and Freddie Mac carry only implied backing
  • Why exchange-traded notes (ETNs) carry issuer credit risk as unsecured debt, but exchange-traded funds (ETFs) generally do not because they hold actual securities in a trust
  • How downgrade risk drops a bond's price even when the issuer never misses a payment, and why the coupon rate stays fixed

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