Microsoft PowerPoint - PoF.ppt

Ratingƒ 115

... expected return on a loan

Ÿ

agreed interest rate

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Measurement of credit risk:

ratings;

a bond rating is a

quality ranking of a specific debt issue

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How rating agencies rate the bonds:

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2 aspects of credit risk:

default probability and expected loss

in the event of default

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Main factors taken into account:

macroeconomic data

(rule of

thumb: country rating > bond rating)

, industry/regulatory

trends, management quality, operating/financial positions, company structure, and issue structure

Multi-period deterministic cash flows: FI securities - Credit risk