Downgrade risk, not just default risk calculator
In short
Most credit loss is the first, not the second.
Interactive: downgrade risk, not just default riskMedium
Most credit loss in a diversified portfolio comes from downgrades rather than defaults, because downgrades are far more common and the spread widening is immediate. This puts both on the same scale.
- Spread income
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- Expected downgrade loss
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- Expected default loss
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- Net expected return
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- Breakeven spread
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- Reading
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- Why it matters
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Raise the downgrade probability to 20% — a realistic figure for the bottom of the investment-grade band in a recession — and watch the net return. This is the arithmetic behind the fallen-angel effect: the forced selling that follows a downgrade across the investment-grade boundary is what makes that particular notch worth more than all the others combined. See how to read a credit rating.
The idea behind it
This calculator belongs to Credit Derivatives, where the mechanism it computes is explained step by step, with the formula, what each input means and where the simple model stops being right. Everything is computed in your browser; nothing you type is sent anywhere.
Instruments it applies to
- Credit Default Swap — Insurance on a borrower's default — and the market's sharpest real-time gauge of credit fear.
- Credit-Linked Note — A bond with a CDS hidden inside: earn an enhanced coupon for carrying someone else's default risk.
- CLO — Leveraged corporate loans, tranched into everything from AAA paper to private-equity-style equity.
- Asset Swap — A bond with its interest-rate risk surgically removed, leaving pure credit. The package that turns any bond into a floating-rate note and defines the spread the market quotes.
- Leveraged Loan — The senior, secured, floating-rate sibling of the junk bond — and the raw material every CLO is built from.
- Factoring & Receivables Finance — Selling the money your customers owe you, today, at a discount. Financing that follows the invoice rather than the balance sheet — which is why weak companies can use it and why it hides so well.
More calculators from Credit Derivatives
- Spread ⇄ default probability — the credit triangle.
- Spread-duration P&L — the credit trader's mental arithmetic.
- Tranche loss calculator — where a portfolio loss lands in the stack.
- CDS–bond basis — the classic relative-value gap.
- Expected loss and the breakeven spread — default probability times the loss when it happens.
- Altman Z-score — the 1968 distress screen, still in use.
- Distance to a contingent-convertible trigger — the headroom, and why the trigger is rarely what fires.