Credit risk and Perpetuity: Difference between pages

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imported>Doug Williamson
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imported>Doug Williamson
(Slight rewording to make description clearer)
 
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1.


The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter.
A perpetuity is similar to an annuity except that the fixed periodic cash flow starting one period into the future then carries on for ever (‘in perpetuity’) rather than stopping at a future point.  


In exchange-for-value settlement systems, the risk is generally defined to include both replacement cost risk and principal risk.
The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as:
 
Present Value = A<sub>1</sub> x 1/r




2.
2.


A weighted measure reflecting both the maximum possible amount of the credit loss (also known as the credit exposure), and the likelihood of such loss.
For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate starting from one period into the future to infinity as:
 
Present Value = A<sub>1</sub> x 1/[r-g]
 
where g = the periodic rate of growth of the cash flow.
 
The growing perpetuity concept is applied by the Dividend growth model for share valuation.




== See also ==
== See also ==
* [[Banker's payment]]
* [[Annuity]]
* [[CCR]]
* [[Dividend growth model]]
* [[Counterparty risk]]
* [[Growing perpetuity]]
* [[Covenant]]
* [[Perpetuity due]]
* [[Credit default swap]]
* [[Perpetuity factor]]
* [[Credit derivative]]
* [[Simple annuity]]
* [[Credit exposure]]
* [[Credit rating]]
* [[Credit rating agency]]
* [[Credit risk diversification]]
* [[Capital risk]]
* [[ECL]]
* [[Event risk]]
* [[Exchange-for-value system]]
* [[High-yield]]
* [[KMV]]
* [[Merton distance-to-default]]
* [[Operational risk]]
* [[Pre-settlement risk]]
* [[Price risk]]
* [[Prime bank]]
* [[Principal risk]]
* [[Putting a limit on losses]]
* [[Replacement cost risk]]
* [[Reputational risk]]
* [[Risk mitigation]]
* [[Sovereign risk]]
* [[TED spread]]
* [[Transaction risk]]


[[Category:Manage_risks]]
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]

Revision as of 15:52, 30 May 2015

1.

A perpetuity is similar to an annuity except that the fixed periodic cash flow starting one period into the future then carries on for ever (‘in perpetuity’) rather than stopping at a future point.

The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as:

Present Value = A1 x 1/r


2.

For a growing perpetuity the present value formula is modified to take account of the constant periodic growth rate starting from one period into the future to infinity as:

Present Value = A1 x 1/[r-g]

where g = the periodic rate of growth of the cash flow.

The growing perpetuity concept is applied by the Dividend growth model for share valuation.


See also

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