Credit Risk exam question
How do you assess the credit risk/worthiness of a counterparty that does not have financial statements?
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You can look at the yield spread of a bond that was issued by the company. If the yield on their bonds has a high spread vs a risk free bond (like treasury bond with similar maturity) or vs the yield spreads of comparable bonds then the market effectively believes that the risk pertaining to this company is relatively higher. You can also look at the spread of a CDS contract. You can think of the spread on a CDS contract for an issuer as a “fee” that you pay for protecting your bond against default. The higher spread you pay the riskier the market perceives the credit.
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