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Evaluation of the Fair Credit Risk Premium in Commercial Lending

Aboura, Sofiane; Lépinette, Emmanuel (2018), Evaluation of the Fair Credit Risk Premium in Commercial Lending. https://basepub.dauphine.fr/handle/123456789/18448

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Type
Document de travail / Working paper
External document link
https://hal.archives-ouvertes.fr/hal-01863448
Date
2018
Series title
Cahier de recherche CEREMADE, Université Paris-Dauphine
Pages
20
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Author(s)
Aboura, Sofiane
Centre d'Economie de l'Université Paris Nord [CEPN]
Lépinette, Emmanuel
CEntre de REcherches en MAthématiques de la DEcision [CEREMADE]
Abstract (EN)
We consider the problem of characterizing and computing the fair credit risk premium that a firm should pay when borrowing money from a bank. Using a risk-neutral approach, we show that there is a unique credit risk premium for a commercial loan depending on the firm's strategy such that the expected discounted value of the bank's payoff coincides with the loan's par value. We then propose a numerical procedure to estimate the premium.
Subjects / Keywords
Corporate Loans; Credit Risk; Investment Decisions; Portfolio Choice; Contingent Pricing