Hello everyone. I’ve decided to start this blog to share some of the more interesting things I have encountered while working in the credit finance world. This blog will be focusing on explaining the mathematics and intuition behind pricing and evaluating risk on a variety credit instruments.
So what exactly is Credit?
Broadly, credit refers to borrowing or lending activity when there is risk that the borrowing party may not pay back their debt in full. Lending to a home buyer, a public company, or betting with a third party about whether or not public company X will default are all considered to be credit-risky investments. Lending money to the U.S. government, however, would not be considered a credit investment since the U.S. is thought to have no or de minimis default risk.1
Credit instruments include bonds, loans, and a suite of derivatives that are actively traded by banks, mutual funds, and hedge funds.
Why is credit important?
The debt market is actually much larger than the equity market.
In 2010, the total value of all global debt outstanding reached around $158 trillion while the total value of global equities outstanding was $54 trillion.2
Understanding debt is integral to understanding the equity of credit risky companies.
The equity of a company has no intrinsic value if the company is unable to pay off its debts. Therefore any changes in the creditworthiness of a company must impact the value of its equity as well.
The health of the credit market is linked to the health of the overall economy.
When companies can borrow at low interest rates, they can grow more quickly and boost the economy. When too much credit is available to risky borrowers, as it was in the years preceding the 2008 financial crisis, it can lead to economic collapse.
Whom is this blog intended for?
This blog is intended for anyone who is interesting in learning more about the credit markets. I will be starting with posts that include the basics of the various instruments involved before writing about more complex or nuanced topics.
Thanks for reading!