CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
A bond has a face value of 1,000. In default, the bondholders are expected to recover 380 per bond. The loss given default as a percentage of exposure is closest to:
Loss given default is about 62%. Recovery is 380 on 1,000, a 38% recovery rate, so the loss is 100% minus 38%, or 62% of the exposure.
- A38%
- B62%Correct
- C76%
Explanation
Recovery rate = 380/1,000 = 38%. Loss given default = 1 - 0.38 = 62%. The 38% option confuses recovery with loss, and 76% doubles the recovery rate.
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