Hi David,
I find it easier to explain the relationship between price of Debt ‘D’ and spread & between time 'T' and spread using the original formula mentioned on page 7 of presentation 6. f rather than the solved formula for spread on page 9
Credit Spread = 1/T-t ln (D/F) – r)
Formula on page 7:
D = F exp –(r+s)T
Here if we decrease the spread ‘s’ obviously the exponent (-ve) becomes small and value of of Debt rises. Or in other words when the value of Debt increase the spread has to fall / narrow down to balance the equation.
Example: D = 100 exp - (.05 + .04)*1 = 91.392
D = 100 exp - (.05 + .02)*1 = 93.239
D = F exp –(r+s)T
Secondly, when everything is kept equal then, when the value of T increases then the Spread ‘s’needs to narrow down to keep value of Debt the same.
Hope it does not add to any confusion.
D.
I find it easier to explain the relationship between price of Debt ‘D’ and spread & between time 'T' and spread using the original formula mentioned on page 7 of presentation 6. f rather than the solved formula for spread on page 9
Credit Spread = 1/T-t ln (D/F) – r)Formula on page 7:
D = F exp –(r+s)T
Here if we decrease the spread ‘s’ obviously the exponent (-ve) becomes small and value of of Debt rises. Or in other words when the value of Debt increase the spread has to fall / narrow down to balance the equation.
Example: D = 100 exp - (.05 + .04)*1 = 91.392
D = 100 exp - (.05 + .02)*1 = 93.239
D = F exp –(r+s)T
Secondly, when everything is kept equal then, when the value of T increases then the Spread ‘s’needs to narrow down to keep value of Debt the same.
Hope it does not add to any confusion.
D.
