Basics of Investment Banking Domain

23 Feb A firm, acting as underwriter or agent, that serves as an intermediary between an issuer of securities and investing institutions. Normally an investment bank buys a new issue of securities for a negotiated price. The investment bank then forms a syndicate and resells the securities to its customers and to the public. Investment banks assist public and private corporations in raising funds in the Capital Markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions. They stand at the heart of financial markets in that they help make both the primary market and, through their trading desks and market makers, the secondary market too STOCK Stock is share in the ownership of a company. Stock represents the claim on the companys assets and earnings as well as voting rights attached to the stock. Company issues the stock for raising the fund (thro IPO). As a return, investor may get the dividend and value appreciation of the stock. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. When you buy a debt investment (bonds), you are guaranteed the return of your money (principal) along with the promised interest payments. If you are buying a stock, as a small business owner, it is not guaranteed a return. As an owner, your claim on assets is lesser than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, dont get any money until the banks and bondholders have been paid out. Different Types of Stock Common Stock Majority of the stock is in this form. Has voting rights for electing the board members. Preferred Stock Guaranteed Dividend. In the time of liquidation, the preferred stock holder will get preference than common stock holder. No voting rights. P/E Ratio This is calculated by dividing the current stock price by earnings per share from the last four quarters.

EPS The portion of a companys profit allocated to each outstanding share of common stock. EPS serves as an indicator of a companys profitability. Calculated as:

FUTURES A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something, for a set price, that a seller has not yet produced. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commoditiesremember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than exchange physical goods (which is the primary activity of the cash/spot market). That is why futures are used as financial instruments by not only producers and consumers but also speculators. A futures contract is an agreement between two parties: a short position, the party who agrees to deliver a commodity, and a long position, the party who agrees to receive a commodity. In every futures contract, everything is specified: the quantity and quality of the commodity, the specific price per unit, and the date and method of delivery. A Farmer and the bread maker may enter into a futures contract requiring the delivery of 5,000 bushels of grain to the buyer in June at a price of $4 per bushel. say the futures contracts for wheat increases to $5 per bushel the day after the above farmer and bread maker enter into their futures contract of $4 per bushel. The farmer, as the holder of the short position, has lost $1 per bushel because the selling price just increased from the future price at which he is obliged to sell his wheat. The bread maker, as the long position, has profited by $1 per bushel because the price he is obliged to pay is less than what the rest of the market is obliged to pay in the future for wheat. On the day the change occurs, the farmers account is debited $5,000 ($1 per bushel X 5,000 bushels) and the bread makers account is credited by $5,000 ($1 per bushel X 5,000 bushels). As the market moves every day, these kinds of adjustments are made accordingly. Unlike the stock market, futures positions are settled on a daily basis, which means that gains and losses from a days trading are deducted or credited to a persons account each day. In the stock market, the capital gains or losses from movements in price arent realized until the investor decides to sell the stock or cover his or her short position.

As the accounts of the parties in futures contracts are adjusted every day, most transactions in the futures market are settled in cash, and the actual physical commodity is bought or sold in the cash market. The players in the futures market fall into two categories: hedgers and speculators. Hedgers - Farmers, manufacturers, importers and exporters can all be hedgers. A hedger buys or sells in the futures market to secure the future price of a commodity intended to be sold at a later date in the cash market. This helps protect against price risks. Speculators - Other market participants, however, do not aim to minimize risk but rather to benefit from the inherently risky nature of the futures market. These are the speculators, and they aim to profit from the very price change that hedgers are protecting themselves against. Unlike the hedger, the speculator does not actually seek to own the commodity in question. Rather, he or she will enter the market seeking profits by offsetting rising and declining prices through the buying and selling of contracts. Going Long When an investor goes longthat is, enters a contract by agreeing to buy and receive delivery of the underlying at a set priceit means that he or she is trying to profit from an anticipated future price increase. Going Short A speculator who goes shortthat is, enters into a futures contract by agreeing to sell and deliver the underlying at a set priceis looking to make a profit from declining price levels. By selling high now, the contract can be repurchased in the future at a lower price, thus generating a profit for the speculator. Spreads Spreads involve taking advantage of the price difference between two different contracts of the same commodity. There are many different types of spreads, including: Calendar spread This involves the simultaneous purchase and sale of two futures of the same type, having the same price, but different delivery dates. Inter-Market spread Here the investor, with contracts of the same month, goes long in one market and short in another market. For example, the investor may take Short June Wheat and Long June Pork Bellies. Inter-Exchange spread This is any type of spread in which each position is created in different futures exchanges. For example, the investor may create a position in the Chicago Board of Trade (CBOT) and the London International Financial Futures and Options

Exchange (LIFFE). Margins In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities. In the futures market, margin refers to the initial deposit of good faith made into an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses. When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished. For example, if your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount. Leverage: The Double-Edged Sword In the futures market, leverage refers to having control over large cash amounts of commodities with comparatively small levels of capital. In other words, with a relatively small amount of cash, you can enter into a futures contract that is worth much more than you initially have to pay (deposit into your margin account). It is said that in the futures market, more than any other form of investment, price changes are highly leveraged, meaning a small change in a futures price can translate into a huge gain or loss. Due to leverage, if the price of the futures contract moves up even slightly, the profit gain will be large in comparison to the initial margin. However, if the price just inches downwards, that same high leverage will yield huge losses in comparison to the initial margin deposit. For example, say that in anticipation of a rise in stock prices across the board, you buy a futures contract with a margin deposit of $10,000, for an index currently standing at 1300. The value of the contract is worth $250 times the index (e.g. $250 x 1300 = $325,000), meaning that for every point gain or loss, $250 will be gained or lost. If after a couple of months, the index realized a gain of 5%, this would mean the index gained 65 points to stand at 1365. In terms of money, this would mean that you as an investor earned a profit of $16,250 (65 points x $250); a profit of 162%! On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250 a huge amount compared to the initial margin deposit made to obtain the contract. This means you still have to pay $6,250 out of your pocket to cover your losses.

Pricing and Limits Prices on futures contracts, however, have a minimum amount that they can move. These minimums are established by the futures exchanges and are known as ticks. Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per ounce closed at $5. Todays upper price boundary for silver would be $5.25 and the lower boundary would be $4.75. If at any moment during the day the price of futures contracts for silver reaches either boundary, the exchange shuts down all trading of silver futures for the day. The next day, the new boundaries are again calculated by adding and subtracting $0.25 to the previous days close. Each day the silver ounce could increase or decrease by $0.25 until an equilibrium price is found. Because trading shuts down if prices reach their daily limits, there may be occasions when it is NOT possible to liquidate an existing futures position at will. OPTIONS What are Options? An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties. First, when you buy an option, you have a right but not the obligation to do something. You can always let the expiration date go by, at which point the option is worthless. If this happens, you lose 100% of your investment, which is the money you used to pay for the option (as token).Second, an option is merely a contract that deals with an underlying asset. For this reason, options are called derivatives, which mean an option derives its value from something else. Calls and Puts The two types of options are calls and puts: A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires. A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires. There are four types of participants in options markets depending on the position they take: 1. Buyers of calls

2. Sellers of calls 3. Buyers of puts 4. Sellers of puts People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions. -Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose. -Call writers and put writers (sellers) however are obligated to buy or sell. Selling options is more complicated and can thus be even riskier. The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date. For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value. The total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value), and volatility. Why use Options? There are two main reasons why an investor would use options: to speculate and to hedge. Speculation When you buy an option, you have to be correct in determining not only the direction of the stocks movement, but also the magnitude and the timing of this movement. To succeed, you must correctly predict whether a stock will go up or down, and you have to be right about how much the price will change as well as the time frame it will take for all this to happen. Hedging Imagine you wanted to take advantage of technology stocks and their upside, but say you also wanted to limit any losses. By using options, you would cost-effectively be able to restrict your downside while enjoying the full upside.

A Word on Stock Options Many companies use stock options as a way to attract and to keep talented employees, especially management. They are similar to regular stock options in that the holder has the right but not the obligation to purchase company stock. The contract, however, is between the holder and the company, whereas a normal option is a contract between two parties that are completely unrelated to the company. An Example of how Options Work Lets say that on May 1st, the stock price of Corys Tequila Co. is $67 and the premium (cost) is $3.15 for a July 70 Call, which indicates that the expiration is the 3rd Friday of July and the strike price is $70. The total price of the contract is $3.15 x 100 = $315. In reality, youd also have to take commissions into account, but well ignore them for this example. Remember, a stock option contract is the option to buy 100 shares; thats why you must multiply the contract by 100 to get the total price. The strike price of $70 means that the stock price must rise above $70 before the call option is worth anything; furthermore, because the contract is $3.15 per share, the break-even price would be $73.15. When the stock price is $67, its less than the $70 strike price, so the option is worthless. But dont forget that youve paid $315 for the option, so you are currently down by this amount. Three weeks later the stock price is $78. The options contract has increased along with the stock price and is now worth $8.25 x 100 = $825. Subtract what you paid for the contract, and your profit is ($8.25 $3.15) x 100 = $510. BONDS Bonds are debt. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a shareholder. However, the bondholder does not share in the profits if a company does well he or she is entitled only to the principal plus interest. Why Bother With Bonds? Take two situations where this may be true: 1) Retirement The easiest example to think of is an individual living off a fixed income. A retiree simply cannot afford to lose his/her principal as income for it is required to pay the bills. 2) Shorter time horizons Characteristics

Face Value/Par Value The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. A newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds. What confuses many people is that the par value is not the price of the bond. A bonds price fluctuates throughout its life in response to a number of variables (more on this later). When a bond trades at a price above the face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount. Coupon (The Interest Rate) The coupon is the amount the bondholder will receive as interest payments. Its called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However, this was more common in the past. Nowadays, records are more likely to be kept electronically. Most bonds pay interest every six months, but its possible for them to pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is $1,000, then itll pay $100 of interest a year. A rate that stays as a fixed percentage of the par value like this is a fixed-rate bond. Another possibility is an adjustable interest payment, known as a floating-rate bond. In this case the interest rate is tied to market rates through an index, such as the rate on Treasury bills. A lower coupon means that the price of the bond will fluctuate more. Maturity The maturity date is the date in the future on which the investors principal will be repaid. Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued). A bond that matures in one year is much more predictable and thus less risky than a bond that matures in 20 years. Therefore, in general, the longer the time to maturity, the higher the interest rate. Also, all things being equal, a longer term bond will fluctuate more than a shorter term bond. Issuer The issuer of a bond is a crucial factor to consider, as the issuers stability is your main assurance of getting paid back. For example, the U.S. government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small so small that U.S. government securities are known as risk-free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. A company, on the other hand, must continue to make profits, which is far from guaranteed. This added risk means corporate bonds must offer a higher yield in order to entice investors this is the risk/return tradeoff in action.

The bond rating system helps investors determine a companys credit risk. Think of a bond rating as the report card for a companys credit rating. Blue-chip firms, which are safer investments, have a high rating, while risky companies have a low rating. Notice that if the company falls below a certain credit rating, its grade changes quality to junk status. Junk bonds are aptly named: they are the debt of financial difficulty. Because they are so risky, they have to offer much other debt. This brings up an important point: not all bonds are inherently certain types of bonds can be just as risky, if not riskier, than stocks. Yield, Price and Other Confusion A bonds price changes on a daily basis. At any time, a bond can be sold in the open market, where the price can fluctuate. Measuring Return with Yield Yield is a figure that shows the return you get on a bond. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200). Yield to Maturity When bond investors refer to yield, they are usually referring to yield to maturity (YTM). Maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium). Price in the Market The factor that influences a bond more than any other is the level of prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, thereby raising the yield of the older bonds and bringing them into line with newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, thereby lowering the yield of the older bonds and bringing them into line with newer bonds being issued with lower coupons. Different Types of Bonds Government Bonds

Treasury bonds (More than 10 years maturity) Treasury notes (1 to 10 years) Treasury bills (less than one year). Treasury bills arent bonds because of their short maturity. All debt issued by Uncle Sam is regarded as extremely safe, as is the debt of any stable country. The debt of many developing countries, however, does carry substantial risk. Like companies, countries can default on payments. Municipal Bonds Municipal bonds, known as "munis", are the next progression in terms of risk. Cities dont go bankrupt that often, but it can happen. The major advantage to munis is that the returns are free from federal tax. Because of these tax savings, the yield on a muni is usually lower than that of a taxable bond. Corporate Bonds Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on. The companys credit quality is very important: the higher the quality, the lower the interest rate the investor receives. Other variations on corporate bonds include convertible bonds, which the holder can convert into stock, and callable bonds, which allow the company to redeem an issue prior to maturity. Zero-Coupon Bonds This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, lets say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; youd be paying $600 today for a bond that will be worth $1,000 in 10 years. How Do I Buy Bonds? Most bond transactions can be completed through a full also open an account with a bond broker, but be warned minimum initial deposit of $5,000. If you cannot afford mutual fund that specializes in bonds (a bond fund). Credit Derivatives- a primer What is a credit derivative?

A credit asset is the extension of credit in some form: normally a loan, installment credit or financial lease contract. Every credit asset is a bundle of risks and returns: every credit asset is acquired to make certain returns on the asset, and the probability of not making the expected return is the risk inherent in a credit asset. There are several reasons due to which a credit asset may not end up giving the expected return to the holder: delinquency, default, losses, foreclosure, prepayment, interest rate movements, exchange rate movements, etc. A credit derivative contract intends to transfer the risk of the total return in a credit transaction falling below a stipulated rate, without transferring the underlying asset. For example, if bank A enters into a credit derivative with bank B relating to the formers portfolio, bank B bears the risk, of course for a fee, inherent in the portfolio held by bank A, while bank A continues to hold the portfolio. The motivation to enter into credit derivatives transactions is well appreciable. In part, it is a design by a credit institution; say a bank, to diversify its portfolio risks without diversifying the inherent portfolio itself. In part, the trend towards credit derivatives has been motivated by bankers need to meet their capital adequacy requirements. Let us visualize a bank, say Bank A which has specialized itself in lending to the office equipment segment. Out of experience of years, this bank has acquired a specialized knowledge of the equipment industry. There is another bank, Bank B, which is, say, specialized in the cotton textiles industry. Both these banks are specialized in their own segments, but both suffer from risks of portfolio concentration. Bank A is concentrated in the office equipment segment and bank B is focused on the textiles segment. Understandably, both the banks should diversify their portfolios to be safer. One obvious option for both of them is: Bank A should invest in an unrelated portfolio, say textiles. And Bank B should invest in a portfolio in which it has not invested still, say, office equipment. Doing so would involve inefficiency for both the banks: as Bank A does not know enough of the textiles segment as bank A does not know anything of the office equipment segment. Here, credit derivatives offer an easy solution: both the banks, without transferring their portfolio or reducing their portfolio concentration, could buy into the risks of each other. So bank B buys a part of the risks of the portfolio that is held by Bank A, and vice versa, for a fee. Both continue to hold their portfolios, but both are now diversified. Both have diversified their risks. And both have also diversified their returns, as the fees being earned by the derivative contract is a return from the portfolio held by the other bank. The above example has depicted credit derivatives being a bilateral transaction as a sort of a bartering of risks. As a matter of fact, credit derivatives can be completely marketable contracts: the credit risk inherent in a portfolio can be securitized and sold in the capital

market just like any other capital market security. So, any one who buys such a security is inherently buying a fragment of the risk inherent in the portfolio, and the buyers of such securities are buying a fraction of the risks and returns of a portfolio held by the originating bank. Thus, the concept of derivatives and securitization have joined together to make risk a tradable commodity. A definition of credit derivatives: Credit derivatives can be defined as arrangements that allow one party (protection buyer or originator) to transfer credit risk of a reference asset, which it may or may not own, to one or more other parties (the protection sellers). Types of credit derivatives: The easiest and the most traditional form of a credit derivative is a guarantee. Financial guarantees have existed for thousands of years. However, the present day concept of credit derivatives has traveled much farther than a simple bank guarantee. The credit derivatives being currently used in the market can be broadly classified into the following: Total return swap: As the name implies, a total return swap is a swap of the total return out of a credit asset against a contracted prefixed return. The total return out of a credit asset can be affected by various factors, some of which may be quite extraneous to the asset in question, such as interest rate movements, exchange rate fluctuations etc. Nevertheless, the protection seller here guarantees a prefixed return to the originator, who in turn, agrees to pass on the entire collections from the credit asset to the protection seller. That is to say, the protection buyer swaps the total return from a credit asset for a predetermined, prefixed return. Credit default swap: Credit default swap is a refined form of a traditional financial guarantee, with the difference that a credit swap need not be limited to compensation upon an actual default but might even cover events such as downgrading, apprehended default etc. In a credit default swap, the protection seller agrees, for an upfront or continuing premium or fee, to compensate the protection buyer upon the happening of a specified event, such as a default, downgrading of the obligor, apprehended default etc. Credit default swap covers only the credit risk inherent in the asset, while risks on account of other factors such as interest rate movements remain with the originator. Credit linked notes: Credit linked notes are a securitized form of credit derivatives. The technology of securitization here has been borrowed from the catastrophe bonds or risk securitization

instruments click here to get more details. Here, the protection buyer issues notes. The investor who buys the notes has to suffer either a delay in repayment or has to forego interest, if a specified credit event, say, default or bankruptcy, takes place. This device also transfers merely the credit risk and not other risks involved with the credit asset. ISDA Credit Event definitions The 6 Credit Events under ISDA Definitions are: 1. 2. 3. 4. 5. 6. Bankruptcy Obligation Acceleration Obligation Default Failure to Pay Repudiation/Moratorium Restructuring

A. CREDIT EVENTS 1. Bankruptcy Bankruptcy in the 1999 Definitions mirrors the wording of Section 5(a)(vii) of the ISDA Master Agreement. It is widely drafted so as to be triggered by a variety of events associated with bankruptcy or insolvency proceedings under English law and New York law, as well as analogous events under other insolvency laws. ISDA is aware that the scope of the definition of Bankruptcy may be wider than insolvency-related events falling within the credit assessment criteria used by rating agencies. Certain actions taken by the reference entity, for instance, a board meeting or a meeting of shareholders to consider the filing of a liquidation petition, could be argued as being in furtherance of an act of bankruptcy and thus triggering a Credit Event, even though such act would not generally be considered a bankruptcy event in the context of credit assessment by a rating agency. Therefore, the inclusion of this Credit Event could provide credit protection ahead of such circumstances. By contrast, a guarantee would not typically provide any protection against insolvencyrelated events ahead of an actual failure to pay. 2. Obligation Acceleration Obligation Acceleration covers the situation, other than a Failure to Pay, where the relevant obligation becomes due and payable as a result of a default by the reference entity before

the time when such obligation would otherwise have been due and payable. The Default Requirement builds in a minimum threshold which the relevant sum being accelerated must exceed before the Credit Event occurs. The scope of this Credit Event forms a subset of that of Obligation Default. Thus if Obligation Default is specified as a Credit Event in the relevant credit derivatives transaction, this Credit Event will only be of relevance if the Default Requirement is lower than that in respect of the Obligation Default. The credit considerations are discussed under Obligation Default below. 3. Obligation Default Obligation Default covers the situation, other than a Failure to Pay, where the relevant obligation becomes capable of being declared due and payable as a result of a default by the reference entity before the time when such obligation would otherwise have been capable of being so declared. The Default Requirement builds in a minimum threshold which the relevant sum being defaulted or capable of being accelerated must exceed before the Credit Event occurs. It may be important to note that the concept of "default" used in the present context refers to a default under the relevant provisions of the relevant contract or agreement. 4. Failure to Pay Failure to Pay is defined to be a failure of the reference entity to make, when and where due, any payments under one or more obligations. Grace periods for payment are taken into account. The failure of payment is critical to the credit risk borne by a protection buyer under a credit derivative product. A failure to pay by an underlying reference entity also encompasses the situations in which guarantee payments are generally triggered. 5. Repudiation/Moratorium Repudiation/Moratorium deals with the situation where the reference entity or a governmental authority disaffirms, disclaims or otherwise challenges the validity of the relevant obligation. A default requirement threshold is specified. 6. Restructuring Restructuring covers events as a result of which the terms, as agreed by the reference entity or governmental authority and the holders of the relevant obligation, governing the relevant obligation have become less favorable to the holders that they would otherwise have been. These events include a reduction in the principal amount or interest payable under the

obligation, a postponement of payment, a change in ranking in priority of payment or any other composition of payment. A default threshold amount can be specified. This approach purports to adopt an objective approach by identifying specific events that are typical elements of a restructuring of indebtedness. As restructuring events could be those undertaken by a reference entity that would result in the credit quality being improved or remaining the same, the Credit Event under the 1999 Definitions is specified not to occur in circumstances where the relevant event does not result from deterioration in the creditworthiness or financial condition of the reference entity.