what short term and long term issues pose an immediate threat
when establishing credit?
what short term and long term issues pose an immediate threat
when establishing credit?
Solutions
Expert Solution
Credit risk is the possibility of a
loss resulting from a borrower's failure to repay a loan or meet
contractual obligations. Traditionally, it refers to the risk that
a lender may not receive the owed principal and interest, which
results in an interruption of cash flows and increased costs for
collection. Excess cash flows may be written to provide additional
cover for credit risk.
Traditionally, it refers to the
risk that a lender may not receive the owed principal and interest,
which results in an interruption of cash flows and increased costs
for collection. When a lender faces heightened credit risk, it can
be mitigated via a higher coupon rate, which provides for greater
cash flows.
Although it's impossible to know
exactly who will default on obligations, properly assessing and
managing credit risk can lessen the severity of a loss. Interest
payments from the borrower or issuer of a debt obligation are a
lender's or investor's reward for assuming credit risk.
Short & Long Term Issue:
When lenders offer mortgages,
credit cards, or other types of loans, there is a risk that the
borrower may not repay the loan. Similarly, if a company offers
credit to a customer, there is a risk that the customer may not pay
their invoices. Credit risk also describes the risk that a bond
issuer may fail to make payment when requested or that an insurance
company will be unable to pay a claim.
Credit risks are calculated based
on the borrower's overall ability to repay a loan according to its
original terms. To assess credit risk on a consumer loan, lenders
look at the five Cs: credit history, capacity to repay, capital,
the loan's conditions, and associated collateral.
Some companies have established
departments solely responsible for assessing the credit risks of
their current and potential customers. Technology has afforded
businesses the ability to quickly analyze data used to assess a
customer's risk profile.
If an investor considers buying a
bond, they will often review the credit rating of the bond. If it
has a low rating (< BBB), the issuer has a relatively high risk
of default. Conversely, if it has a stronger rating (BBB, A, AA, or
AAA), the risk of default is progressively diminished.
Bond credit-rating agencies, such
as Moody's Investors Services and Fitch Ratings, evaluate the
credit risks of thousands of corporate bond issuers and
municipalities on an ongoing basis. For example, a risk-averse
investor may opt to buy an AAA-rated municipal bond. In contrast, a
risk-seeking investor may buy a bond with a lower rating in
exchange for potentially higher returns.
a. What is short-term credit, and what are the major sources of
credit?
b Is there a cost to accrued liabilities? Fully explain your
rationale.
c. What control do the company's have over accrued
liabilities?
d. SPP is considering using secured short-term financing. What
is a secured loan? What types of current assets can be used to
secure the loans?
e. What are the differences between pledging receivables and
factoring receivables?
With the Expectations Theory, explain what happens to long term
interest rates when future short term interest rates are expected
to (a) fall and (b) increase.
What are the characteristics of short-term and long-term
liabilities? What are some examples of each that you own? How do
businesses account for at least two long-term liabilities?
What happens to output per worker in the short term and long
term if the amount of labor increases (L upwards arrow) in the
basic Romer model ? (Your answer should compare the output to what
it would have been on its prior trajectory.) Briefly explain the
economic intuition.