Usage of Moody's KMV Model to Estimate a Credit Limit for a Firm
9 Pages Posted: 22 Jan 2015
Date Written: January 22, 2015
Abstract
A simple approach to explicit estimating a credit limit for a firm that is based on Moody’s KMV model is developed. It allows taking into account term to maturity of loan, quality of assets, a structure of a balance sheet and required level of default probability. The proposed approach describes such well-known intuitive phenomena as the more term to maturity, the less credit limit; the more level of confidence, the lower credit limit, and the more volatility of return on assets, the less credit limit. The result of the estimation of credit limit on an unsecured loan to a firm is given. A contribution of the approach is that it allows taking into account the fact that a firm may invest new debt in new assets with quality that differs from that of existing assets.
Keywords: structural model, Moody’s KMV model, probability of default, level of confidence, credit limit, unsecured loan, asset portfolio, balance sheet, bankruptcy, overlending
JEL Classification: G21, G32, G33
Suggested Citation: Suggested Citation