Managing potential loan conflicts
We all have our own style of managing conflict. Our conflict resolution style is the mechanism that helps us deal with conflict psychologically. Conflict can also influence our behavior in a variety of ways—from rage, anger, and confrontation (fight responses) to denial, avoidance, and retreat (flight responses).We learn these strategies at a very early age—between birth and three or four years old. They become our primary or inherent styles of conflict resolution. The four inherent styles are evader, harmonizer, compromiser, and fighter; each is some form of fight-or-flight response.We create elaborate strategies to cope with conflict in order to maintain control of our situations and get what we want. The challenge is managing conflict in a way that allows each person involved to walk away feeling like a winner. To do this, we must understand the strategies for managing conflict, including the most important strategy, a Win-Win Orientation.
If the issuer does not default, which is, measured by historical standards, extremely unlikely for an A-rated company, an investor earns an incremental coupon income of 100 bp over a 1-year horizon. Conditional on the fact that the bond receives a downgrade to Baa during the course of the year, a price depreciation of 50 bp times the duration of the bond at the end of the year, that is approximately 3.5, would have to be expected. Since Baa-rated US corporate bonds on average traded at 150 bp over treasuries, 50 bp represents the spread widening that has to be expected as a consequence of the downgrade. Consequently the investor expects a negative excess return of 100 – 3.5x 50= -75 bp, if the rating is downgraded from A to Baa. Table 9.4 details the same computation for the other potential rating changes.