Discounted Contractual Cashflow Approach
The current value of a non-defaulted loan is measured as the present value of its future cash flows.
The cash flows are discounted using credit spreads which are equal to market-determined spreads for obligations of the same grade.
If external market rates cannot be applied, spreads implied by internal default history can be used.
The future value of a non-defaulted loan is dependent on the risk rating at the end of the time horizon and the credit spreads for that rating.
Therefore, changes in the value of the loan are the result of credit migration or changes in market credit spreads.
In the event of a default, the future value is determined by the recovery rate, as in the default mode paradigm.