The Credit Perspective. Here we can see the credit perspective in economic terms. We loan 100 million for three years at 5%. We receive 5 million per year in interest for three years and also get back the original 100 million. Our upside is therefore capped. If things go well, we get 115 million after three years. If things go great, we get 115 million after three years. If things go badly, however, we risk losing the entire amount. There are obviously a range of outcomes in between, depending on how we have structured the loan. Therefore, we must look for ways to minimize the downside. An easy way to understand the debt versus equity, risk versus return principle is to look at buying a home with debt, also known as a mortgage. A $1 million home is purchased using the traditional 20% equity and 80% debt. Three years go by and life is good for the owner of the house who has just seen her equity increase three times without lifting a finger. How did the bank do in all of this? Hopefully, it lent at a decent rate and made some good fees on the deal because the bank will not be participating in any of the equity upside. There is a silver lining for the bank, however, which is that should something happen to the borrower's ability to make payments, the asset to loan value is solid, and the bank, whose loan is secured by the home asset, is in very good shape. Now for the bad news. In this situation, it looks like there has been some sort of crash, similar to 2008 where values plunged. How would the bank get its money back? The loan to value here is very poor, leaving the bank very vulnerable. This is sometimes called underwater for the owner. The bank can only hope that the borrower still has good cash flow to make the mortgage payments. Should the cash flows dry up due to job loss or similar reason, there would be a default and it would result in a major loss for the bank.