Hi all,
I'm trying to create a model to stress test muni bonds for a particular state.
I need the model to be able to run scenarios on how far bond prices must fall to make the state's interest expense exceed revenues, which would trigger a default.
The key point i'm trying to get from this model are:
-What interest rate would this bond price? -What probability is this likely to happen -How much does the risk of state bankruptcy increase over time into 2013, 2014, etc?
I have no credit background and my fixed income knowledge is pretty rusty. Can anyone suggest the best way I go about doing this? If you can direct me to a website or some sort of template that i could take a look at---I would be very grateful and do anything I can to return the favor. Any tips/suggestions are welcome.
Thanks in advance.
-CKA
eeeek
Ah a question I can answer. But before I spend 30 minutes explaining it, have you read other Muni research reports? You can find dozens of them online from MS, GS, etc. They'll give you adequate details for a variety of situations.
If you could answer that q I can answer your three qs.
I've mainly been reading up on how the current Sovereign Default crisis affecting the EU because I figure that a similar methodology can be applied to what I am trying to accomplish. I've also looked over some reports issued by credit agencies and meeting transcripts. I'm also reading about how the default probability of bonds is based on the cost of the CDS. I have no idea how to quantify my findings into an excel model.
All I learned in school about bonds is your basic bond math. Do you think I'm going about this the right way?
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