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

Define accounts receivable are sometimes not collected, Accounts receivable...

Accounts receivable are sometimes not collected.  Why do companies extend trade credit when they could insist on cash for all sales? Extending trade credit almost all the time le

Interest rate anticipation strategies, Active bond management depends...

Active bond management depends on an economic scenario in order to forecast the movements of yield curve. A portfolio manager skillfully builds a portfolio wit

Bank credit, Definition of 'Bank Credit': The amount of credit availab...

Definition of 'Bank Credit': The amount of credit available to a business or individual from the banking system. It is the aggregate of the amount of funds financial instituti

Explain to tr, TR has recently been promoted to his first management positi...

TR has recently been promoted to his first management position. In the past, he very much enjoyed working as part of a team, but is having some difficulty in adapting to his new ro

Financial Management, Financial Management Initial Disclosures During the ...

Financial Management Initial Disclosures During the process of discussion and negotiation with the client with regard to the financial affairs and the manner of operations of the

Partition of investment risk, Partition of Investment Risk The expecte...

Partition of Investment Risk The expected returns and the fluctuation in returns are two factors in evaluating investments. Expected Returns While the actual returns

Define main trends which prevailed in international business, Discuss the t...

Discuss the three main trends which have prevailed in international business throughout the last two decades. The 1980s brought a fast integration of financial markets and inter

Calculate average amount of working capital required, X & Y is desirous to ...

X & Y is desirous to purchase a business and has consulted you, and one point on which you are asked to advice them, is the average amount of working capital which will be required

Expects the per capita expenditure, Expects the per capita expenditure: ...

Expects the per capita expenditure: A township expects its population of 5,000 to grow annually at the rate of 5%. The township currently spends $300 per inhabitant, but, as t

Difference international and domestic financial management, How is internat...

How is international financial management different from domestic financial management? Answer:  There are three main dimensions that set separately international finance from

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