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Distressed Debt Analysis: Strategies for Speculative Investors by Stephen Moyer

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CAPITAL STRUCTURESAND THE ALLOCATIONAND MANAGEMENTOF CREDIT RISK

In Chapter 6, the concept of credit risk was defined and attributed to three sources of risk: leverage, priority, and time. From the notion of relative leverage, the concept of credit capacity was developed to provide a quantitative foundation for the perhaps intuitively obvious propositions that (1) as debt increased, credit risk increased and (2) there is only so much debt that any firm can prudently assume. In this chapter, the other sources of credit risk — priority and time — are discussed within the context of how capital structures allocate and manage credit risk.

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