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. The Importance Of Your Credit Rating
    Credit & Loans

    The Importance Of Your Credit Rating

  2. How Credit Cards Affect Your Credit ...
    Credit & Loans

    How Credit Cards Affect Your Credit ...

  3. How To Establish A Credit History
    Options & Futures

    How To Establish A Credit History

  4. How can I improve my credit score?
    Investing

    How can I improve my credit score?

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center