So it's no longer just interest rate and default risks
that are getting the attention of examiners.
While default risks
remain elevated, mortgage originators need not be as apprehensive about new originations," said Capozza, who is also a founding principal of UFA.
This does not mean that corporate default risks
are permanently lower," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research.
With these differences in swap and bond default risks
, swap-pricing theory implies that the yield on a par bond of equivalent maturity will be greater than or equal to swap bid-ask rates due to the existence of greater default risk
It is found that when the insurable and the default risks
are independent, underinsurance on average is optimal if insurance is fair or unfavorable.
On the premise that the above variables capture changes in the perception of interest rate and default risks
by the financial markets, the multifactor regression model is specified as:
This finding strongly suggests that insured bonds with differing intrinsic default risks
are not priced equally as they should be if the complete insurance coverage is a valid signal of bond quality.
Speculation occurs when instruments with low credit ratings or high default risks
are purchased to obtain higher yields.
Lenders should remain cautious since default risks
Whether setting loss reserves or pricing new loan products, the most pressing need for lenders may be in learning how to measure and price default risks
in residential loans.