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Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

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Answer:

B

The unconditional PD for the fourth year is 14.5% minus 10% or 4.5%.The probability of no earlier default is 90%.The PD conditional on no earlier default is therefore 0.045/0.9=0.05 or 5%

Which of the following is usually used to define the recovery rate of a bond?

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A

The recovery rate for a bond is usually defined as the value of the bond immediately after a default as a percent of its face value.This is in spite of the fact that the bond holder's claim in the event of a default in many jurisdictions is the face value plus accrued interest.

Which of the following is true?

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B

Risk neutral default probabilities are usually greater than real world default probabilities.

A hazard rate is 1% per annum.What is the probability of a default during the first two years?

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If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years

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A derivatives dealer has a single transaction with a company which is a long position in a five-year option.The Black-Scholes-Merton value of the option is $6.Suppose that the credit spread on five-year bonds issued by the company is 100 basis points.What is the dealer's CVA per option purchased from the counterparty?

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The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.The recovery rate is 60%.What is closest to the unconditional default probability for the sixth year?

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Which of the following is true of Creditmetrics when it is used to calculate credit VaR

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