Abstract
Abstract We describe the pricing of corporate term loans and revolving credit lines within a risk‐neutral framework. The method accounts for credit‐ and market‐related term loan prepayments and for drawdown and repayment of revolving credit lines. Loans are priced using backward induction on a risk‐neutral credit‐transition lattice, testing for the prepayment criterion and default at each node. The risk‐neutral credit transitions are determined from historical data and modified to be consistent with market prices of credit default swaps. The model provides estimates of the average lives of loans and loan price and prepayments sensitivities to relevant market movements.
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