Lecture 5 Credit Risk

Lecture 5 Credit Risk - McGraw-Hill/Irwin Lecture 5 Credit...

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Unformatted text preview: McGraw-Hill/Irwin Lecture 5 Credit Risk I Instructor: Lixiong Guo Date: August 17, 2011 Overview of Chapter 11 This chapter discusses types of loans, and the analysis and measurement of credit risk on individual loans Important for purposes of: Pricing loans and bonds Setting limits on credit risk exposure Credit quality problems can drain on capital cause an FI to become insolvent. 5-2 Credit quality problems Problems with junk bonds, LDC loans, and residential and farm mortgage loans Late 1990s, credit card and auto loans Crises in other countries such as Argentina, Brazil, Russia, and South Korea 2006-2007: Mortgage delinquencies and subprime loans Emphasizes importance of managing credit risk 5-3 Types of loans Commercial and Industrial (C&I) loans Short-term C&I loans (T1year) w To finance working capital needs and other short-term funding needs. Long-term C&I loans (T>1year) w To finance long-term credit needs. Real Estate loans Residential mortgages Commercial mortgages Home equity loans 5-4 Types of loans (cont.) Individual (Consumer) loans Nonrevolving loans: this includes auto loans and other fixed-term consumer loans. Revolving loans: credit card loans is an example of revolving loans. Other loans. 5-5 Commercial and industrial Loans Secured vs. unsecured loan A secured loan (asset-backed loan) is backed by specific assets of the borrower. An unsecured loan (junior debt) has only a general claim on the assets of the borrower in case of defaults. Spot loan vs. loan commitment Spot loan: the entire loan amount is taken down immediately. Loan commitment (line of credit): the borrower has the option to taken down the loan anytime over the commitment period. 5-6 C & I loans (cont.) Fixed- vs. floating-rate loans Fixed-rate: the FI bears all the interest rate risk. Floating-rate: the interest rate risk is transferred in large part to the borrower. Syndicated loan: a loan provided by a group of FIs as opposed to a single lender. Large C&I loans are often syndicated. 5-7 Commercial Papers Commercial paper is an unsecured short- term debt instrument issued by corporations either directly or via an underwriter. In December 2007 in the US, commercial papers outstanding was $1,788.1 billion compared to $1,445.8 billion in bank loans....
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Lecture 5 Credit Risk - McGraw-Hill/Irwin Lecture 5 Credit...

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