Default risk, Financial Management

Assignment Help:

Default risk is the risk that arises when the issuer is not able to satisfy the terms and conditions of the obligation with respect to timely payment of interest and repayment of the amount borrowed. If a default occurs, the investor does not lose the entire amount invested as he can recover a certain percentage of the investment. This is called recovery rate. The percentage of a population of bonds that is expected to default is called default rate. Given the default rate and the recovery rate, the estimated expected loss due to a default can be computed.

Default risk is associated with corporate bonds unlike treasury bonds since there is a risk of non-payment of principal and interests either partially or fully due to several factors.

The difference between the investor's expected rate of return and the actual rate of return offered is known as risk premium. This includes the risk associated with a particular bond depending on the likelihood of default either partially or fully. This risk premium depends on the issuer's financial position and fundamentals. Normally, credit rating agencies rate the companies  for their issues on the basis of certain factors like capital structure, leverage ratio, earnings ratio, current ratio, the performance of the particular industry, etc., by giving necessary weightages to evolve the rating for the companies. Rating agencies like S&P, Moody's, CRISIL, ICRA, etc., give credit ratings for the issuing company. Companies with higher rating will have lesser default possibility compared to the companies with lesser ratings.


Related Discussions:- Default risk

Explain composite currency bond, Explain Composite Currency Bond Compos...

Explain Composite Currency Bond Composite currency bonds are denominated in a currency basket, like SDRs or ECUs, in place of a single currency.They are often known as currency

The safety margin, Norfolk Ltd is specialized in producing & selling air co...

Norfolk Ltd is specialized in producing & selling air conditions.  In 2010, the manufacturing cost per unit included:

Stakeholders, identify five stakeholder groups and breifly explain their fi...

identify five stakeholder groups and breifly explain their financil and other objectives

Discount and premium, What is the  Discount and Premium? Describe please.

What is the  Discount and Premium? Describe please.

Explain about the term investment intermediaries, Explain about the term in...

Explain about the term investment intermediaries. Investment intermediaries: Investment intermediaries contain finance companies, mutual funds and investment banks and se

#pseudocode.., #pseudocode for finance class ..

#pseudocode for finance class ..

Define modern approach of financial management, Define Modern Approach of f...

Define Modern Approach of financial management Modern approach views the term financial management in a broad sense and provides a conceptual and analytical framework for fina

State the traditional approach of financial management, Traditional Approac...

Traditional Approach of financial management Traditional approach to the scope of financial management refers to its subject matter, in academic literature in initial stages o

Rationale for corporate governance, Rationale for corporate governance ...

Rationale for corporate governance The organization of the world economy (particularly in present years) has seen corporate governance gain prominence mostly since: Insti

Price supports or acreage limitation programs cost society, Suppose the gov...

Suppose the government wants to increase farmers’ incomes.  Why do price supports or acreage limitation programs cost society more than simply giving farmers money? Price acrea

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd