Default Risk

A default risk attached to any instrument means risk of uncertainty for payment of return on investment or repayment of principal amount invested.

What is default risk?

What is default risk premium? A default risk premium is an additional amount which an investor

expect while investing in any securities against the default risk.

DRF= R – Rf – IP – LP – MRP, where

◦ DRF = Default Risk Premium◦ R = Required Rate of Return◦ Rf = Risk Free Rate of Return◦ IP = Inflation Premium◦ LP = Liquidity Premium◦ MRP = Maturity Risk Premium

Calculation of default risk premium

It is one kind of insurance to protect the lender in case the borrower fails to repay its obligations. The credit default swap is to safeguard the interest of lender.

The premium charged for credit default swap is called spread. The spread is measured in terms of basis pints.

What is credit default swap?

Collateralized Debt Obligation (CDO)

A credit rating agency is an independent agency who rate the risk profiles of various companies and their instruments based on various factors and analysis.

World known credit rating agencies are;◦ Moody’s Investor Services◦ Standard and Poor’s◦ Fitch RatingIn India◦ Credit Analysis and Research Limited (CARE) Ratings◦ Investment Information and Credit Rating Agency (ICRA)◦ Credit Rating And Information Services of India Limited (CRISIL)◦ SME Rating Agency of India Ltd (SMERA)

Credit Rating Agencies

Credit Risk Management

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