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An overview of project finance binomial loan valuation
Author(s) -
Winsen Joseph K.
Publication year - 2010
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2009.10.002
Subject(s) - loan , actuarial science , valuation (finance) , project finance , sophistication , finance , credit risk , structured finance , business , economics , financial crisis , social science , sociology , macroeconomics
Setting project financing parameters, such as the loan to valuation ratio, loan interest rate, repayment schedules, and fees, requires detailed modelling of the resulting credit risk in a non‐recourse setting. Structured credit risk models, based on the early work of Merton, have been developed in continuous time which can assist with project financing structuring. These models require a level of mathematical sophistication that may not always be available to those undertaking project financing analysis. This note provides an overview of a discrete time binomial approach to structural credit risk modelling, which enables project financing analysts a more accessible tool to evaluate project loan structures.