Credit Risk Management Practice Exam 2025 – Complete All-in-One Guide to Master Your Exam!

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What does the Spread '01 measure?

Change in price from a one basis point change in the Z-spread

The Spread '01 measures the change in the price of a bond or security resulting from a one basis point change in the Z-spread. The Z-spread is the constant spread that must be added to the risk-free yield curve to make the present value of a bond's cash flows equal to its market price. Since the Z-spread takes into account the bond's credit risk over and above the risk-free return, any changes to this spread directly influence the bond's price.

When the Z-spread increases by one basis point, it reflects a higher risk perception or lower demand for the bond, which typically causes its price to drop. Conversely, if the Z-spread decreases, the bond price usually increases due to lower perceived risk or higher demand. Thus, understanding the Spread '01 is crucial for bond investors and risk managers, as it quantifies the sensitivity of the bond’s price to small changes in credit risk, enabling better risk assessment and management strategies.

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Change in interest rates over a year

Future default probabilities over a year

Total liquidity change over time

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