Question #12
Reading: Reading 28 Credit Analysis Models
PDF File: Reading 28 Credit Analysis Models.pdf
Page: 5
Status: Correct
Correct Answer: A
Question
A corporate bond has one year to maturity with a probability of default of 2.05% and a recovery rate of $32.00 per $100 par value. If an investor holds $100,000 of par value, what is the expected loss?
Answer Choices:
A. $1,394
B. $2,050
C. $656
Explanation
Expected
loss
= Probability of default × expected loss per $
× par value
= 0.0205 × (1 − 0.32) × $100,000
= $1,394