[Verse 1]
When a borrower might not pay you back
That's credit risk upon the track
Default probability shows the chance they'll fall
Loss given default tells you how much you'll lose it all
Expected loss combines these two
Recovery rates will see you through
[Chorus]
Credit analysis, breaking it down
PD times LGD, expected loss found
Investment grade or high yield bound
Rating agencies make the sound
Spreads and models, risks unwound
Credit analysis, knowledge profound
[Verse 2]
Investment grade means triple B and higher still
High yield bonds are riskier but pay the bill
Moody's, S&P, and Fitch decide the fate
Migration patterns show how ratings fluctuate
From strong to weak or weak to strong
The rating journey can be long
[Chorus]
Credit analysis, breaking it down
PD times LGD, expected loss found
Investment grade or high yield bound
Rating agencies make the sound
Spreads and models, risks unwound
Credit analysis, knowledge profound
[Verse 3]
G-spread measures over government bonds so clean
Z-spread uses the whole curve, if you know what I mean
I-spread compares to swaps instead
OAS adjusts for options in your head
These spreads reveal the extra yield
For credit risk that won't be healed
[Verse 4]
Merton model sees equity as a call
On firm assets standing tall
If assets fall below the debt
Shareholders get nothing yet
Hazard rates in reduced form
Show default risk through the storm
[Bridge]
Leverage ratios tell the tale
Debt covenants help prevail
Distressed debt for bargain hunters
Credit scoring never flounders
Sovereign risk looks at the state
Fiscal strength determines fate
[Chorus]
Credit analysis, breaking it down
PD times LGD, expected loss found
Investment grade or high yield bound
Rating agencies make the sound
Spreads and models, risks unwound
Credit analysis, knowledge profound
[Outro]
From corporate bonds to sovereign debt
Credit analysis is your best bet
Understanding risk in every loan
Makes credit markets feel like home