CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
A bond has a probability of default of 4% and a loss given default of 55%. Exposure at default is 2,000,000. The expected loss is closest to:
Expected loss is about 44,000. Multiply the 4% default probability by the 55% loss given default and by the 2,000,000 exposure, giving 0.022 × 2,000,000 = 44,000.
- A44,000Correct
- B80,000
- C110,000
Explanation
Expected loss = probability of default × loss given default × exposure = 0.04 × 0.55 × 2,000,000 = 44,000. Using only PD × exposure gives 80,000, which ignores recovery. Using LGD × exposure gives 1,100,000, which ignores PD, and 110,000 results from using 5.5% rather than 2.2%.
Did you get it right without looking?
One question tells you little. A timed set on Credit Analysis for Corporate Issuers shows your real accuracy, how long you take and where you lose marks.
More Credit Analysis for Corporate Issuers questions
- In a corporate bankruptcy that follows the absolute priority of claims, which of the following creditors is most likely to be paid first fro…
- Which of the following industry factors would an analyst most likely consider when evaluating an issuer's capacity?
- A company reports EBITDA of 360, depreciation and amortization of 120, and interest expense of 80. Its EBIT coverage and EBITDA coverage of …
- In credit analysis of a corporate issuer, the four Cs are capacity, collateral, covenants and character. Which of these is most likely asses…
- When analyzing a corporate issuer, an analyst adds capitalized operating lease obligations to reported debt. This adjustment will most likel…
- Which of the following is most likely a feature of the character component when analyzing a corporate issuer's credit quality?