Lgd6 50 and 100 0 and 50 it limits

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LGD6 . ~50% and> 70% ~70% and < 90% ~90% and ::;;100% ~ 0% and < 10% ~10% and < 30% 2:30% and < 50% it limits Acredit limit is the maximum that a creditor will allow a customer to owe at any t in time. These limits are set based on the lender's experience with similar borrowers as well firm-specific credit analysis. Some view a credit limit as the maximum amount that a creditor +illing to lose to the customer. By carefully setting credit limits, creditors can minimize their in the event of default, which limits credit risk. Trade creditors commonly set low credit limits for new customers and higher limits for cus- rs with repayment histories. The Bankruptcy Abuse and Consumer Protection Act (2005) some protection to ordinary trade creditors. The Act provides that accounts payable for shipped to a customer within 20 days before the bankruptcy have a higher priority for pay- t. This reduces the size of a loss but trade creditors must monitor its customers for signs of ptcy and act quickly to limit potential losses. Banks set credit limits on revolving lines of credit. Banks commonly specify that the credit line be reduced in size if the customer's credit rating falls (see covenants below). This serves to '1 potential losses. In the year ended January 2011, Home Depot maintained a $2 billion credit - ,. ty with a consortium of banks.
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Repayment term The "term" of a loan refers to the length of time the creditor has to repay the debt. Trade creditors implement time as part of their credit policies and often offer early pay- ment discounts to control the credit risk. Bank and nonbank financing can be either long-term or short-term but the nature of the loan influences the repayment terms. Lenders will ordinarily want to match the length of the loan to the useful life of the asset, the period over which the asset generates cash flows. Companies use long-term debt to purchase or improve long-term fixed assets (property, plant facilities and equipment). Short-term debt is often used to raise cash for cyclical inventory needs, accounts payable, and working capital. To assess the loss given default, analysts consider the match between asset lives and liability terms. Also, it is generally the case that interest rates on long-term debt are higher than short-term rates. Thus, the repayment term affects the cost of debt. This is another example of the risk and reward trade-off. The longer the term, the higher the chance of default, the greater the credit risk. To compensate for this increased risk, creditors require a higher return. Covenants Covenants are terms and conditions of a loan designed to limit the loss given default and thereby control credit risk after the loan is made. In short, lenders add covenants to 4-21 Module 4 I Credit Risk Analysis and Interpretation Collateral To minimize the loss in the event of default, creditors often secure their transaction by taking collateral. Collateral is property that the borrower pledges to guarantee repayment.
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