Credit Enhancement

AAA

DEFINITION of 'Credit Enhancement'

A method whereby a company attempts to improve its debt or credit worthiness. Through credit enhancement, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third party guarantee. Credit enhancement reduces credit/default risk of a debt, thereby increasing the overall credit rating and lowering interest rates.

INVESTOPEDIA EXPLAINS 'Credit Enhancement'

Credit enhancement is used to obtain better terms for an outstanding debt. Securitization, posting collateral and obtaining external credit enhancement such as a letter of credit are some basic forms of credit enhancement. Firms may also increase cash reserves or take other internal measures to uphold superior solvency ratios.

RELATED TERMS
  1. Solvency Ratio

    One of many ratios used to measure a company's ability to meet ...
  2. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  3. Credit

    1. A contractual agreement in which a borrower receives something ...
  4. Impaired Credit

    A deterioration in the creditworthiness of an individual or entity. ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Surrender Period

    The amount of time an investor must wait until he or she can ...
Related Articles
  1. Credit & Loans

    The Importance Of Your Credit Rating

  2. Credit & Loans

    How Credit Cards Affect Your Credit ...

  3. Options & Futures

    How To Establish A Credit History

  4. Credit & Loans

    How is my credit score calculated?

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center