Creditworthiness assessment as a way of minimising credit risk Dissertation

faithworthiness assessment as a way of minimising recognition encounter - Dissertation ExampleIntroduction Financial firms or investors experience various kinds of risks, out of which the roughly important is the impute risk. Although the market participants commonly consider the credit risk as one dimensional however there actually atomic number 18 three dimensions f credit risk, namely credit-default, credit- bypass, and down-grade credit risks. Credit default risk is the one in which the looser will be inefficient to fulfill the terms of the cartel according to the regular payments of interest as well as the actual loan (Fabozzi, Moorad and Steven, 2003). This type of credit risk includes counterparty risk in a derivative transaction or trade in which the counterparty is unable to meet its obligation. In order to evaluate the credit default risk, investors generally depend upon credit paygrade that is a formal perspective of a company functioning as a rating way of li fe for the credit default risk experienced due to investing in a certain issue of debt securities. The nationally approved or known rating agencies are Standard & Poors, Moodys Investors Service, and Fitch Ratings. Credit spread risk is defined as underperformance or loss of some issue(s) as result of a rise in the credit spread that refers to the compensation desired by the investors so as to recognize an issues or issuers credit default risk. ... Downgrade risk refers to the risk in which an issuer or issue gets degraded that cause an increase in the credit spread desired by the market. Thus, downgrade risk is associated with the credit spread risk. Some times the potential of an issuer to arrive at interest and principal payments undermines greatly and surprisingly due to an unpredicted event. This could be any types of peculiar events that are related to an industry or the tummy, such as a natural or industrial accident, a takeover or a corporate restructuring, a regulatory ch ange, or a corporate fraud. This home of risk is generally referred as an event risk and will compel the rating agencies to downgrade the issuer (Fabozzi, Moorad and Steven, 2003). 1.1. Factors have-to doe with in the Assessment of Credit Default Risk The most evident and significant measure to rid of credit risk is to examine the creditworthiness of the borrower. In carrying out such an assessment, credit analysts investigate or measure the factors that influence the business risk of a borrower. These factors are generalized in to four basic categories, which are the quality of the borrower, the potential of the borrower to fulfill the debt obligation, the seniority level and the security provided in a bankruptcy proceeding, and the constrains utilize on the borrower. The quality of the borrower, in the case of a corporation, includes the assessment of the business strategies and management policies of the firm. Being more(prenominal) specific, a credit analyst will examine th e strategic plan, the financial philosophy, and the accounting control systems of the corporation in relation to the use of debt (Fabozzi, 2009). The potential of the borrower to fulfill its obligations starts with the assessment of the financial