Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a...

Probability of Default (PD) Increase:If the machinery industry experiences adverse structural changes, the economic conditions worsen for Delta Industrial Machinery Corporation. This results in a higher likelihood of financial distress and potential default. Therefore, the probability of default increases.

Loss Given Default (LGD) Increase:In the event of adverse structural changes, the recovery rates on the loan may diminish due to potential decreases in the value of the company’s assets. Hence, the bank might face higher losses if Delta defaults, leading to an increase in the loss given default.

Duration and Loan Value:An increase in both PD and LGD generally signifies greater risk. To compensate for this increased risk, the loan might be extended or restructured, leading to a longer duration. Higher risk and longer duration typically decrease the present value of the loan, as the expected cash flows are discounted more heavily due to the increased risk.