Saturday, April 9, 2011

Credit Risk


It is the risk of non-payment of interest and principal by the security issuer. Government securities are said to be risk free securities. There is inverse relation between the price of securities and level of credit risk. If market perceives such risk increased in the securities after purchase, the investor can sell it at the reduced price only. On the basis of probability of default, there is a practice of rating the debt securities by various rating agencies. If the issuers default, they file for creditor protection under bankruptcy laws. This culminates either in liquidation of the firm (sale entirely to another firm or sale in piecemeal) or in reorganization (merger or any other arrangement). In both the cases, security holders may lose part of principal and accrued interest due to lost goodwill and litigation costs. The credit policy should specify what rated securities it wants to hold in the portfolio. If unrated, whether it buys or not. Since risk is overpriced during recession and under-priced during boom, banks prefer buying medium grade and high-grade securities during recession and boom respectively. Normally, banks buy investment rated securities only.

1 comment:

  1. HOW I GO MY DESIRED XMAS LOAN AMOUNT $520,000.00 FROM A RELIABLE AND TRUSTED LOAN COMPANY LAST WEEK. Email for immediate response: drbenjaminfinance@gmail.com

    Hello everyone, Am here to testify of how i got my loan from BENJAMIN LOAN FINANCE(drbenjaminfinance@gmail.com) I don't know if you are in need of an urgent loan to pay bills, start business or build a house, they offer all kinds of loan. So feel free to contact Dr.Benjamin Scarlet Owen he holds all of the information about how to obtain money quickly and painlessly via Email: drbenjaminfinance@gmail.com

    and consider all your financial problems tackled and solved. Share this to help a soul right now, Thanks

    ReplyDelete