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Loan valuation, a modern finance perspective

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The valuation of bank loans has attracted a lot of attention recently, and the case for marketing-to-market loan potfolios has been made. In this note, five different valuation methods are evaluated vis-à-vis a benchmark, the loan arbitrage-free valuation. This model takes into account five variables that should be reflected in the economic value of a loan transaction, namely the probability of failure, the recovery rate, the tax implications, the level of debt and equity funding, and the risk premium demanded by the market

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