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Finance & Accounting
Pages 4 (1004 words)
(Last Name) (Tutor’s Name) (Date) Credit Risk Introduction In financial accounting, the term credit risk has considerable significance. To define, “credit risk is the risks that a counterparty may be unable or unwilling to make a payment or fulfill contractual obligations” (Gregory, 2010, p.2).
The following part of this paper will make one aware of the concept of credit risk in detail. Credit risk-background The last few decades witnessed the collapse of some major banks as a result of borrowers’ credit repayment failure. Hence, many of the world’s largest banks and other financial institutions have developed comprehensive systems in order to deal with credit risk arising from different aspects of their businesses. The main objectives of such systems involve the identification, quantification, aggregation, and management of credit risk exposures. In modern days, those systems constitute a major part of risk management and performance measurement. Circumstances of credit risk Credit risk issues mainly include lost principal and interest, diminishing cash flow, and rise in collection costs. The credit risk arises in a number of situations and some of them are described below. A business or consumer fails to pay the amount due on a mortgage loan, credit card, or other loan. A business or consumer makes no payment due on a trade invoice. A business fails to pay a worker’s earned wages when due. A government bond issuer does not pay the amount due on a coupon or principal payment. An insolvent insurance company does not make a payment due on a policy obligation. ...
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