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Similar to Chapter 16 the ifrs 9
Similar to Chapter 16 the ifrs 9 (20)
Chapter 16 the ifrs 9
- 1. Copyright © 2018 CapitaLogic Limited
Chapter 16
The IFRS 9
This presentation file is prepared in accordance with
Chapter 16 of the text book
“Managing Credit Risk Under The Basel III Framework, 3rd ed”
Website : https://sites.google.com/site/crmbasel
E-mail : crmbasel@gmail.com
- 2. Copyright © 2018 CapitaLogic Limited 2
Declaration
Copyright © 2018 CapitaLogic Limited.
All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
Authored by Dr. LAM Yat-fai (林日辉),
Principal, Structured Products Analytics, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, FRM, PRM.
- 3. Copyright © 2018 CapitaLogic Limited 3
Outline
Book value
Credit provision and interest income
- 4. Price and value
Price
The amount of cash that
Somebody is willing to receive for selling
Somebody is willing to pay for buying
Value
The amount of cash to be received, assuming
immediately that
I am willing to receive for selling
Somebody is willing to pay for buying
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- 5. Market value
Market value = Market price
For a financial instrument traded actively in
the market
Assuming that the current holding of an
equity can be disposed in the very near future
at a price which is very close to the most
recent market price
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- 6. Model value
Value calculated by a quantitative model
with some independent variables observable directly
or indirectly from the market
On-the-run US treasuries
Of-the-run US treasuries
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k
k
N
N
T
k=0
N
N
T
k=0
IRR
Model va
CF
Market price =
1 +
CF
=
1 + IRR
lue
- 7. Credit risky debt
No active trading market
No market price
Market value not applicable
No market price of similar debt
IRR cannot be derived
Model value not applicable
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- 8. The IFRS 9
An accounting framework set out by the
International Accounting Standards Board
To address the major accounting issues of
financial instruments through a set of unified
practices
Applicable to major financial instruments
To ensure the level playing field among
financial institutions
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- 9. Book value
Value calculated by the IFRS 9 rules
Loan
Book value = Outstanding principal
Corporate bond acquired at principal
Book value = Principal
Book IRR
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Interest rate
Book IRR =
Interest frequency
- 10. Premium or discount corporate bond
Book IRR
Book value
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k
N
N
T
k=0
1 2 3 N
0
1
CF
Acquisition cost =
1 + Book IRR
Book IRR = IRR -Acquisition cost, CF , CF , CF , ... CF
Interest rate
Interest amount = Principal ×
Interest frequency
Book value = Acquisition cost
Book value =
0
2 1
k k-1
Book value × 1 + Book IRR - Interest amount
Book value = Book value × 1 + Book IRR - Interest amount
Book value = Book value × 1 + Book IRR - Interest amount
- 11. Copyright © 2018 CapitaLogic Limited 11
Outline
Book value
Credit provision and interest income
- 12. Present value of expected loss
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k
k-1 k
k T
T T
k
k
Default loss = EAD × LGD
Interest rate
= Principal × 1 + × LGD
Interest frequency
1
Discount factor =
1 + Book IRR
Default likelihood = 1 - PD - 1 - PD
PVEL = Default loss × Discount factor
k k
N
k
k=1
× Default likelihood
PVEL = PVEL
- 13. Credit provision
Lower credit risk at origination
General provision = 1-year PVEL
Return has incorporated the credit risk
Moderate credit risk
General provision = RM-year PVEL
Return has NOT incorporated the credit risk
Higher credit risk
Specific provision = RM-year PVEL
Return has NOT incorporated the credit risk
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- 14. Interest income
Lower credit risk at origination
Book value × Book IRR
Moderate credit risk
Book value × Book IRR
Higher credit risk
(Book value - Specific provision) × Book IRR
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- 15. Extensions
CDOs and government bonds
intended to be held until maturity
similar cash flow pattern
Model value
Credit provision
Interest income
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