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Why the value of the collateral is affected

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Reference no: EM132808432

A bank wants to estimate the value of inventories or fixed assets pledged by a borrower as collateral in the event of default on a loan.

Problem 1: Discuss why the value of this collateral is affected by the likely reasons that a borrower might default on its loan. In particular, compare the value of the collateral in the event of bankruptcy for a firm where the most likely reason for bankruptcy is due to risky investments in derivative securities to a more typical firm where failure of the firm's core business is the main source of bankruptcy risk

Reference no: EM132808432

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