AUTHOR(S): UCHE C. C. NWOGWUGWU and NKEM C. OKEKE
FROM AFRICAN BANKING AND FINANCE REVIEW VOL. 1 NO.2 APRIL 2011
PUBLISHED BY THE DEPARTMENT OF BANKING AND FINANCE, NNAMDI AZIKIWE UNIVERSITY, AWKA.
The study develops a model for valuing deposit guarantees. The model treats the bank’s investment as a portfolio of default-free bonds and risky loans. The risk of the loans is determined by individual firms’ financing and investment decisions in Nigeria as in most developed and developing economies. Pushing back risk to the level of the borrowing firms allows us to link deposit guarantees to specific characteristics of these loans, such as their durations, and to correlations between business risk and interest rates. Since the nature of bank loans has been changing over time, this model should predict the accompanying change in value of the government guarantees.
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