Why is credit risk modeling more difficult than interest-rate modeling?
What will be an ideal response?
There are three reasons that can be cited for why credit risk modeling is more difficult than interest-rate modeling.
First, credit default risk is a rare event and, as a result, the historical data needed to compute the inputs into a credit risk model (e.g., default rates and recovery rates) are considerably less in comparison to the data available for the modeling of interest-rate risk where, for example, historical U. S. Treasury prices are available on a daily basis for many decades.
Second, even with the default data that are available, it is much more difficult to draw any meaningful and possibly predictive conclusions about the probability of default because of the diversity of the corporations involved (in terms of industry sector, size, and leverage) and the lack of complete information regarding corporate practices.
Three, there are various causes of default by a corporate borrower—ranging from microeconomic factors (such as poor management) to macroeconomic factors (such as high interest rates and recession)—that make default hard to predict.
You might also like to view...
Which of the following is an example of an informational resource control?
A. A personality test B. A delivery-tracking system C. A debt-repayment schedule D. A leadership survey E. A competition analysis
Which of the following defines Lapping?
a. embezzling one customer's payment and then crediting that customer's account when a subsequent customer pays. b. stealing cash from an organization before it is recorded on the organization's books and records. c. helping a vendor illegally obtain a contract that should have involved competitive bidding. d. demanding a payment from a vendor in order to make a decision in that vendor's favor.
Which of the following is true of the Health Care Reform Act?
A) Excise taxes for pharmaceuticals are reduced. B) Employers of big corporations are given subsidies for providing health insurance to their employees. C) All employers are mandatorily required to provide health insurance coverage to their employees. D) Persons who do not obtain coverage will be required to pay a tax penalty to the federal government.
Which of the following has not been purchased or invested in by a wealthy individual with ties to the technology industry?
A. Washington Post B. Time Magazine C. The Atlantic Magazine D. The New Yorker