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Financial Terms | |
Credit Risk |
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Definition of Credit RiskCredit RiskFinancial and moral risk that an obligation will not be paid and a loss will result. Credit riskThe risk that an issuer of debt securities or a borrower may default on his obligations, or that the
Related Terms:Current couponA bond selling at or close to par, that is, a bond with a coupon close to the yields currently Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an Accidental Dismemberment: (Credit Insurance)Provides additional financial security should an insured person be dismembered or lose the use of a limb as the result of an accident. Amortization (Credit Insurance)Refers to the reduction of debt by regular payments of interest and principal in order to pay off a loan by maturity. Asset-specific RiskThe amount of total risk that can be eliminated by diversification by Bankruptcy riskThe risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. ![]() Basis riskThe uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for Beneficiary (Credit Insurance)The person or party designated to receive proceeds entitled by a benefit. Payment of a benefit is triggered by an event. In the case of credit insurance, the beneficiary will always be the creditor. Best-interests-of-creditors testThe requirement that a claim holder voting against a plan of reorganization Beta riskrisk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio. Borrower (Credit Insurance)A consumer who borrows money from a lender. Business riskThe risk that the cash flow of an issuer will be impaired because of adverse economic Call riskThe combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Commercial Business Loan (Credit Insurance)An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for business purposes. Commercial riskThe risk that a foreign debtor will be unable to pay its debts because of business events, ![]() Company-specific riskRelated: Unsystematic risk Companyspecific RiskSee asset-specific risk Comparative credit analysisA method of analysis in which a firm is compared to others that have a desired Completion riskThe risk that a project will not be brought into operation successfully. Consumer creditcredit granted by a firm to consumers for the purchase of goods or services. Also called Consumer Credit Protection ActA federal Act specifying the proportion of Counterparty riskThe risk that the other party to an agreement will default. In an options contract, the risk Country financial riskThe ability of the national economy to generate enough foreign exchange to meet Country risk GeneralLevel of political and economic uncertainty in a country affecting the value of loans or CreditMoney loaned. CreditBuying or selling goods or services now with the intention of payment following at some time in ![]() CreditOne side of a journal entry, usually depicted as the right side. CreditA rating of a company's credit (ability to payback debt), usually by a third party credit agency. creditOn your bank statement, 'credit' represents funds that you have deposited into your account. The opposite of a credit is a debit. Credit analysisThe process of analyzing information on companies and bond issues in order to estimate the credit analysisProcedure to determine the likelihood a customer will pay its bills. credit bureauAn organization that provides financial institutions with credit information concerning existing or potential customers who are looking to obtain credit services. credit cardA revolving source of credit with a pre-established limit. You have to pay interest on a credit card if you have an outstanding balance. Credit CrunchA decline in the ability or willingness of banks to lend. Credit enhancementPurchase of the financial guarantee of a large insurance company to raise funds. Credit LossA loan receivable that has proven uncollectible and is written off. credit memoA record of the funds which have been credited to your account. Credit periodThe length of time for which the customer is granted credit. credit policyStandards set to determine the amount and nature of credit to extend to customers. Credit RationingRestriction of loans by lenders so that not all borrowers willing to pay the current interest rate are able to obtain loans. Credit scoringA statistical technique wherein several financial characteristics are combined to form a single Credit spreadRelated:Quality spread Credit TermsConditions under which credit is extended by a lender to a borrower. Credit Unioncredit unions are community based financial co-operatives and most offer a full range of services. All are owned and controlled by members who are also shareholders. credit unions are regulated provincially and insured by a stabilization fund, deposit insurance or guarantee corporation. Crediting rateThe interest rate offered on an investment type insurance policy. CreditorLender of money. CreditorPerson or business that is owed money. Creditor (Credit Insurance)A lender or lending institution that offers financing and loans to a borrower, for the purpose of acquiring a commodity. Creditor Proof ProtectionThe creditor proof status of such things as life insurance, non-registered life insurance investments, life insurance RRSPs and life insurance RRIFs make these attractive products for high net worth individuals, professionals and business owners who may have creditor concerns. Under most circumstances the creditor proof rules of the different provincial insurance acts take priority over the federal bankruptcy rules. CreditorsPurchases of goods or services from suppliers on credit to whom the debt is not yet paid. Or a Critical Illness Insurance (Credit Insurance)Coverage that provides a lump-sum payment should you become seriously ill with a specified illness. The payment is made to your creditors to pay off your debt owing. Cross-border riskRefers to the volatility of returns on international investments caused by events associated Currency riskRelated: Exchange rate risk Currency risk sharingAn agreement by the parties to a transaction to share the currency risk associated with Debt (Credit Insurance)Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. Debt may or may not be secured. Demand line of creditA bank line of credit that enables a customer to borrow on a daily or on-demand basis. Disability Insurance (Credit Insurance)Group Insurance designed to cover monthly obligations due to a borrower being unable to work due to sickness or injury. Diversifiable riskRelated: unsystematic risk. Economic riskIn project financing, the risk that the project's output will not be salable at a price that will Equilibrium market price of riskThe slope of the capital market line (CML). Since the CML represents the EurocreditsIntermediate-term loans of Eurocurrencies made by banking syndicates to corporate and Event riskThe risk that the ability of an issuer to make interest and principal payments will change because Evergreen creditRevolving credit without maturity. Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Exchange riskThe variability of a firm's value that results from unexpected exchange rate changes or the Export Credit InsuranceThe granting of insurance to cover the commercial and political risks of selling in foreign markets. Fallout riskA type of mortgage pipeline risk that is generally created when the terms of the loan to be Federal credit agenciesAgencies of the federal government set up to supply credit to various classes of Financial riskThe risk that the cash flow of an issuer will not be adequate to meet its financial obligations. financial riskrisk to shareholders resulting from the use of debt. Firm-specific riskSee:diversifiable risk or unsystematic risk. Five Cs of creditFive characteristics that are used to form a judgement about a customer's creditworthiness: Flat price riskTaking a position either long or short that does not involve spreading. Force majeure riskThe risk that there will be an interruption of operations for a prolonged period after a Foreign exchange riskThe risk that a long or short position in a foreign currency might have to be closed out Foreign tax creditHome country credit against domestic income tax for foreign taxes paid on foreign Formalized Line of CreditA contractual commitment to make loans to a particular borrower up to a specified maximum during a specified period, usually one year. Full Credit PeriodThe period of trade credit given by a supplier to its customer. Full faith-and-credit obligationsThe security pledges for larger municipal bond issuers, such as states and Funding riskRelated: interest rate risk Geographic riskrisk that arises when an issuer has policies concentrated within certain geographic areas, Herstatt riskThe risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk. High-Risk Small BusinessFirm viewed as being particularly subject to risk from an investors perspective. Idiosyncratic RiskUnsystematic risk or risk that is uncorrelated to the overall market risk. In other words, Inflation riskAlso called purchasing-power risk, the risk that changes in the real return the investor will Insolvency riskThe risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Insurance Policy (Credit Insurance)A policy under which the insurance company promises to pay a benefit of the person who is insured. Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing. Investment tax creditProportion of new capital investment that can be used to reduce a company's tax bill Investment Tax CreditA reduction in taxes offered to firms to induce them to increase investment spending. Job Loss Insurance (Credit Insurance)Coverage that can pay down your debt should you become involuntarily unemployed. The payment is made to your creditors to reduce your debt owing. judgmental method (of risk adjustment)an informal method of adjusting for risk that allows the decision maker Lease (Credit Insurance)Contract granting use of real estate, equipment or other fixed assets for a specified period of time in exchange for payment. The owner or a leased property is the lessor and the user the lessee. Lender (Credit Insurance)Individual or firm that extends money to a borrower with the expectation of being repaid, usually with interest. Lenders create debt in the form of loans. Lenders include financial institutions, leasing companies government lending agencies and automobile dealers. Letter of credit (L/C)A form of guarantee of payment issued by a bank used to guarantee the payment of Letters of CreditA letter of credit is a guarantee of payment by a bank (issuing institution)to a third party for a specific amount of money, if certain conditions are met. Life Insurance (Credit Insurance)Group Term life insurance that pays or reduces the balance due on a loan if the borrower dies before the loan is repaid. Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit. |