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A Note on Debt, Assets and Lending under Default Risk

Published online by Cambridge University Press:  06 April 2009

Gershon Feder
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Extract

The existence of default risk is an important characteristic of most lending operations, and many of the studies dealing with lending behavior incorporate default risk considerations. Two basic approaches to the modeling of such behavior can be identified according to their treatment of default probabilities: the first approach assumes that the likelihood of default is independent of the actions of the lender under consideration, namely, the volume of the loan granted by the current lender has no impact on the default probability (e.g., the works by Yawitz [9], Feder and Just [3], and Bierman and Hass [2]). Such an assumption may be quite appropriate in situations where the volume of operations of a single lender is rather small relative to the size of borrower's assets (or previous debt), as is the case with most bond buyers or with banks who lend to sovereign borrowers.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 1 , March 1980 , pp. 191 - 200
Copyright
Copyright © School of Business Administration, University of Washington 1980

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References

REFERENCES

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