O'Reilly logo

Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Credit risk pricing

Let us consider the following loan proposal:

Funding
Loan100Interbank debt94
  Equity6
  • $100 million two-years-to-maturity fixed-rate loan (interest paid at the end of the year and principal at maturity).

  • Corporate tax rate: 40%.

  • Shareholders’ opportunity return (cost of equity): 13.2%.

  • Fixed interbank rate: 10% for the first year and 10% for the second year.

  • Equity funding (economic capital): 6%.

  • Interbank funding: 94%.

  • Probability of default in Year One: 0%.

  • Probability of default in Year Two: 3%.

  • Recovery of 60 in case of default (or loss-given default) = 40.

As we learned in Stage 7 (loan pricing), the break-even loan interest rate R is such that the discounted value of expected after-tax cash flows is equal to the initial equity ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required