Credit scoring is used as a statistical method to perform a risk classification for private standardized installment loans and small loans. Such loans are usually unsecured and are awarded based solely on the personal credit of the borrower.
The aim is a fast credit decision in the processing of personal loans, the detailed financial situation of the borrower can be resolved only to a small extent. It considers personal characteristics (such as occupation, employer, marital status, account management in-house, both positive and negative features of the credit report) and economic conditions (disposable income and financial circumstances, expected spending).
Financial institutions and Credit Management Programs use the information on their own customers to draw on experiences in their customer relationship and the credit decision made by the loan officer.
Valuation rules that classify the data to be collected and assign a point value (the score) can be deposited in various methods. In addition to standalone applications, spreadsheet applications or paper-based process descriptions are common.
Credit linked notes
Credit-linked notes refers to bonds whose repayment amount depends on certain contractually agreed credit events. They belong to the structured notes. They allow you to hedge the issuer’s credit risk on bonds and simultaneously offering investors of proceeds from the reference debt.
A credit linked note is similar to a bond. From out of the bond, the issuer promises to repay the principal amount at maturity. At the same time, the issuer has purchased from bond issue a CDS on a particular reference obligation and pays the seller of the CDS (investor) a premium (based on the basic interest rate).
If a credit event occurs, the issuer would be required to repay the nominal value. On the other hand, the investor in the CLN (credit risk buyer) would simultaneously be obliged to make a compensation payment from the CDS. As part of the loan agreement, both payments are netted, and the Issuer is only obliged to pay the difference between the two payments.
A typical credit event is the failure of a reference obligation or a reference bond as indicated by Credit Management Programs. Credit-linked notes offer the opportunity to transfer credit risk from the seller to the buyer, the credit risk can be assembled in almost any fashion.
With credit derivatives, credit-linked notes are also open to investors who can not enter into credit default swaps, for example, private investors and insurance companies. The design possibilities of mezzanine capital are legally less regulated than, for example, share capital so that flexible financing solutions are possible and available to organizations.
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