Credit Risk Flashcards
What is a “default”?
When a borrower on a mortgage loan fails to meet the obligations of the loan.
What is “credit risk”?
The expected economic loss under a potential borrower default over the life of the contract.
What is “Capacity”?
The ability of the borrower to make its debt payments on time.
What is “capital”?
other company resources available that reduce reliance on debt.
What is “collateral”?
assets or financial guarantees underlying a debt obligation that are above and beyond the issuer’s promise to pay.
What are “convenats”?
The terms and conditions of lending agreements that the issuer must comply with; they specify the actions that an issuer is obligated to perform (affirmative covenant) or prohibited from performing (negative covenant).
What is “character”?
The quality of a debt issuer’s management.
What are “conditions”?
The general economic, competitive, and business environment faced by all borrowers that may affect their ability to service or refinance debt.
What is the “country” aspect of credit risk?
The geopolitical environment as well as the legal and political system faced by all issuers in a jurisdiction that may affect debt payments.
What is “currency”?
Money issued by national monetary authorities.
What is “Expected Loss” (EL)?
Default probability times loss severity given default.
What is the probability of default (POD)?
The likelihood that an issuer fails to make full and timely payments of principal and interest; typically an annualized measure.
What is “Loss given default”?
The investor’s loss conditional on an issuer event of default.
What is the “recovery rate”?
The percentage of an outstanding debt claim recovered when an issuer defaults.
What is “loss severity”?
Portion of a bond’s value (including unpaid interest) an investor loses in the event of default.
