Altman's Z-Score is a financial formula developed by Edward I. Altman in the 1960s that is used to predict the likelihood of a company entering bankruptcy within the next two years. Utilizing multiple corporate income and balance sheet values, this score provides an insight into the financial stability of a business.
The act of transferring property, rights under a contract, or benefits under a trust to another person, or a document (a deed of assignment) facilitating such a transfer. This term also encompasses the transfer of bank loans between financial institutions to mitigate credit risk.
A bank loan, also known as a bank advance, is a specified sum of money lent by a bank to a customer for a specific period at a specified rate of interest.
A CDO is a structured finance instrument consisting of a bond or note backed by a pool of fixed-income assets, with varying levels of credit risk allocated to different tranches.
A Credit Default Option (CDO) is an option that grants the holder the right, but not the obligation, to enter into a credit default swap at a predetermined price on a specified future date. It is a form of swaption and is used to hedge against credit risk.
A Credit Default Swap (CDS) is a financial derivative that allows an investor to 'swap' or offset their credit risk with that of another investor.
Credit risk refers to the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. This concept is crucial for lenders and investors as it impacts the stability and profitability of financial institutions and markets.
A deadbeat is an individual or entity that neglects or intentionally avoids paying their bills for goods or services received, creating financial burdens for service providers and creditors.
The delinquency rate is a statistical measure that indicates the percentage of loans with overdue payments within a loan portfolio. It is used to assess the financial health and risk exposure of the portfolio.
Disintermediation refers to the removal of intermediaries from financial transactions. This process, driven by technology, deregulation, and globalization, reduces costs but may increase credit risk.
Factoring is a financial transaction where a business sells its accounts receivable to a third party (factor) at a discount, providing the business with immediate working capital.
The FICO score is a measure of borrower credit risk extensively utilized by creditors, including mortgage loan originators. Developed by Fair Isaac Corporation, it encompasses an applicant's credit history and credit utilization to determine loan approval and terms.
Intermediation refers to the activity performed by a bank, financial institution, broker or similar entity, acting as a go-between for two parties in a transaction. Intermediaries may accept some or all associated credit or commercial risks.
Off-balance-sheet financing refers to financial arrangements that do not appear on a company's balance sheet, thus not affecting its borrowing capacity as measured by financial ratios. It is commonly seen in operating leases rather than capital leases. GAAP requires disclosure of such financing in financial statements regarding credit, market, and liquidity risk.
Payment in advance, also known as prepayment, is a transaction in which a payment for goods or services is made before the actual delivery. It is often used to mitigate credit risk or secure services and goods ahead of time.
Political Credit Risk, also known as Sovereign Risk, emerges from actions by a foreign government that can influence the management of a foreign business, affect control over its assets, and impact its capacity to meet financial obligations towards its creditors.
The process of systematically assigning ranks or evaluations to goods and services based on set criteria, encompassing various domains such as credit, investment, and insurance.
The recovery rate is a measurement in finance that represents the extent to which principal and accrued interest of defaulted debt are reclaimed by a creditor. It is a crucial metric for risk assessment and investment decision-making in the realm of distressed securities and defaulted bonds.
Measurable possibility of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable. Various types of risk include actuarial risk, exchange risk, inflation risk, interest rate risk, inventory risk, liquidity risk, political risk, repayment (credit) risk, risk of principal, systemic risk, underwriting risk, and unsystemic risk.
Sovereign risk, also known as political credit risk, refers to the risk that a foreign central government will default on its loan obligations or fail to honor other financial commitments, potentially leading to financial loss for investors.
A tranche is a portion or slice of a larger sum of money or a security with differing risk-return profiles used in financial operations such as loans, funding, and securitizations.
Transfer credit risk refers to the risk faced by a creditor, often in long-term contracts, due to a foreign debtor's inability to obtain foreign currency from the central bank despite being able and willing to pay. It is an aspect of international credit exposure.
Unsecured debt is an obligation or loan that is not backed by the pledge of specific collateral as security for the repayment of the debt.
Unsecured Loan Stock (ULS) refers to a type of loan stock or debenture that is not backed by specific assets, making it a type of unsecured debt.
Value-at-Risk (VaR) is a statistical technique developed to measure and quantify the level of financial risk within a firm or portfolio over a specific time frame. It represents the maximum potential loss with a given confidence level.
