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Cashflow Simulation for Evaluating Credit Risk on Corporate Bonds

Published online by Cambridge University Press:  18 August 2016

V. H. Karmarker
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Extract

Corporate bonds and privately placed loans constitute a large proportion of the portfolios of several financial institutions. When bonds of a corporation are purchased in the market or loans are granted by some other arrangement, the lender evaluates the risk relating to the investment in question. Determination of the level of risk is important, among other things, for facilitating comparison between different investments, setting the terms of loan agreements and making a rational decision concerning the acceptance or rejection of a loan proposal. Since evaluation of risk is very important for rational investment decision-making, the nature of risk in bond investment is examined briefly in the next section. In the subsequent sections, the prevailing techniques of evaluation of risk will be reviewed and the cash flow simulation model presented.

Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 97 , Issue 1 , June 1971 , pp. 85 - 97
Copyright
Copyright © Institute and Faculty of Actuaries 1971

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References

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