CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
In credit analysis, the two components of expected loss on a bond are best described as the:
Expected loss combines the probability of default with the loss severity given default. Multiplying the chance that the borrower defaults by the share of exposure lost if it does gives expected loss. Coupon, maturity and spread are not its components.
- Aprobability of default and loss severity given defaultCorrect
- Byield spread and the recovery rate on senior debt
- Ccoupon rate and the time to maturity of the bond
Explanation
Expected loss is the probability of default multiplied by loss severity (loss given default). Spread, coupon and maturity affect pricing but are not the components of expected loss.
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