Valuation Models for Default-Risky Securities: An Overview.

Valuation models for default risky securities are evaluated. It is important for financial institutions to have reliable estimates of credit exposure because of the vast amount of securities in their portfolios. The strengths and weaknesses of these models is necessary to allow financial institutions to have realistic risk management policies.

Valuing financial securities often assumes that the contractual obligations of the security are going to be honored. However, frequently a party to a contract will default on its obligations. An issuer of a corporate bond may be unable to make its promised coupon and principal payments, and a party to a derivatives contract such as an interest ...

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