Obligation default

Preconditions and rely conditions, by default, are true and there is no obligation on the sender. Similarly, an empty postcondition or guarantee condition imposes no obligation on the implementor. 

Neither Party shall be liable to the other Party or shall be in default of its obligations hereunder if such default is the result of war, hostilities, revolution, civil commotion, strike, epidemic, accident, fire, wind, flood or because of any act of God or other cause beyond the reasonable control of the Party affected. The Party affected by such circumstances shall promptly notify the other Party in writing when such circumstances cause a delay or failure in performance ( a Delay ) and where they cease to do so. In the event of a Delay lasting for [... insert number...] weeks or more the non-affected Party shall have the right to terminate this Agreement immediately by notice in writing to the other Party. 

It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check a check which has come back marked insufficient funds. But we refuse to believe that the bank of justice is bankrupt. We refuse to believe that there are insufficient funds in the great vaults of opportunity of this... 

Default by the purchaser. What happens in the event the purchaser fails to meet its obligations... 

Eliminates contractor A performance bond is a guarantee by a surety to the owner that the contractor will complete the work in accordance with the plans and specifications. If the contractor defaults under the terms of the contract, the surety becomes responsible for the contractor s obligations and must complete the work in accordance with the terms of the contract. 

At the heart of the Merton s assumptions, equity holders have an embedded put option by which if at maturity the firm value is greater than promised obligation ox face value, the lender gets back the bond s amount and shareholder maintains the ownership of the company otherwise, if the firm value is lower than the promised payment, the bondholders receive an amount less than bond s face value and the firm defaults. Therefore, in the case of high-put option value, shareholders will have an advantage to walk away from the loan payment, leaving the asset value to the bondholders. 

The key to assessing the probability of borrower default lies in assessing their ability and willingness to pay. Affordability is usually measured either as an income multiple for the loan or the ratio of the borrower s monthly debt obligations to their monthly net income. The higher the level of borrower income is relative to debt obligations, the better the ability of the borrower to absorb any financial shocks. 

Credit derivative products are defined by reference to underlying reference entities, and reference obligations, which include corporate bonds, bank loans, sovereign debt, Brady bonds, and Eurobonds. Credit derivatives are now used increasingly in structured transactions. For example synthetic collateralised loan obligations (see Chapter 15) often use credit default swaps to transfer credit risk from the originator to the special purpose vehicle (SPV). Currently, the most common products are credit default products and total return swaps. 

The market for single-name credit default swaps has rapidly developed in volume over the past few years and represents the highest proportion of the global credit derivatives market by notional value. The credit default swap is linked to the reference entity and its obligations. 

Within the credit derivative market, a common tenor for transactions is the 5-year maturity. Credit default swaps have most liquidity at the 3-year and 5-year maturity/tenor. As a result, we often see that 5-year credit default swaps are used in structured credit transactions, such as collateralised synthetic obligations (CSOs) for this reason. Credit derivatives with a long maturity (over five years or with a short maturity (under one year) are less common. 

The most common form of settlement chosen is physical settlement, in this situation the buyer of protection will deliver the defaulted asset or other assets that are pari passu with the reference obligation—effectively the asset delivered is covered by the credit default swap contract—to the seller of protection for par value (in cash). 

Credit default counterparties require absolute clarity on the terms of the CDS at the time they enter into transactions for example, the reference entity, reference obligation characteristics and deliverable obligation characteristics, credit events, and valuation process are key discussion points. 

In a distressed exchange (i) the borrower offers lenders/debtholders a new security or package of securities that amount to a diminished financial obligation (e.g., preferred or common stock or debt with a lower coupon or par amount) or (ii) the exchange has the purpose of allowing the borrower to avoid default. 

The pricing of credit default swaps is determined in the credit default swap market by traders who determine the credit default swap spread through their assessment of the default risk of the reference obligations. This spread information can give valuable information about the key pricing components of the reference credit implied probability of default of the reference credit and recovery assumptions. These price... 

In practice, the spread information from the CDS market is used to imply the probability of default and the hazard rate for the underlying reference entity. The recovery rate is an input when the calculation of implied probabilities takes place. It is common to assume a recovery rate that reflects the rate on the cheapest to deliver deliverable obligation. Credit derivative traders will monitor the prices of the cheapest to deliver bonds (i.e., deliverable obligations with the lowest recovery), when constructing hedges. 

Recovery rates on bonds vary by the position in the reference entity s capital structure and the level of security offered to the bond holders. Determining the appropriate recovery rate is not a trivial process and requires careful analysis into the traded prices of deliverable obligations for the reference credit. In practice there is limited historical information on the recovery rates experienced for credit default swaps. 

In recent years, the valnation of certain synthetic instrnments, snch as credit default swaps (CDS), has become a routine task in financial markets. Meanwhile, variations on the core CDS product are emerging, and more complex instruments, such as synthetic collateralized debt obligations (CDOs), that use CDSs as building blocks for larger transactions continue to see analytic evolution. This chapter provides an introduction to the basics of pricing and explores some of the tools available to those involved in the synthetics market. 

The Pricing of Credit Default Swaps and Synthetic Collateralized Debt Obligations... 

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