Portfolio theory optimizes the risk and return characteristics of a portfolio, typically through diversification and identificaiton of assets with uncorrelated return distributions. This chapter provides an overview of portfolio approaches to portfolios of credit assets, and provides more thorough descriptions of Altman`s portfolio approach (which uses historical return data ... click here for more details.
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The assessed probability of default on the part of the borrower is an important input in the credit decision. At portfolio level, other factors come into play: the actual exposure at default (the extent to which a credit line has been utilized); how the probability of ... click here for more details.
Classic credit analysis is a systematic approach to assessing creditworthiness that relies heavily on the subjective judgment of lenders, the use of financial ratios and the outlook of the industry in which the company operates. This chapter provides a thorough overview of classic credit analysis, including the general steps ... click here for more details.
Some credit risk measurement systems use a company`s stock price as a gauge of its financial health and creditworthiness. This chapters provides an introduction to these approaches to credit risk measurement, starting with their origins in options theory and how to view and model debt as an option. ... click here for more details.
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As discussed in Chapter 7, Classic Credit Analysis, outcomes from credit decisions are not only uncertain based on the borrower or counterparty’s position but may also be affected by macrovariables that are outside the control of the borrower. These variables include exogenous factors such as the ... click here for more details.
Most generally, a credit derivative is a financial contract in which parties agree to a cash flow arrangement that is contingent upon a credit event. This chapter provides a thorough introduction to credit derivatives, using simple examples and explaining the most common types of credit derivatives, namely credit swaps, ... click here for more details.
Various approaches to pricing assets and measuring the performance of assets are discussed and compared in this chapter. In particular, the RAROC (risk-adjusted return on capital) methodology and the VaR (value at risk) approach are highlighted, including the general steps in calculating each measure. The relationship between ... click here for more details.
Public debt is generally rated by the rating agencies at its issue date and then reviewed periodically and adjusted as credit quality changes. Credit migration from one rating to another can have significant impact on returns and the pool of eligible investors. This chapter considers several studies of ... click here for more details.
This chapter explains the role of counterparty credit risk in the derivatives market. Counterparty credit risk is measured by calculating exposure (or replacement cost) and expected losses (using probability of default and expected recovery rates). The role of counterparty credit risk in interest rate swaps and currency swaps ... click here for more details.
This chapter provides abundant information and analysis on historical default rates, default losses and recovery rates, primarily for the period from 1971 to 1997. Tables include information about historical corporate US bond default rates, cumulative default rates by rating, comparison of syndicated bank loan vs. corporate bond mortality rates, ... click here for more details.