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FRM Part II · FRM Exam Part II · Credit Value at Risk

In CreditMetrics, a bond's value at the horizon if it migrates to a given non-default rating is found by:

The bond's value in a non-default rating state is found by discounting its remaining cash flows with the forward zero curve for that new rating. That curve includes the rating's credit spread, so downgrades lower value and upgrades raise it.

  1. ADiscounting the remaining cash flows at the forward zero curve for that ratingCorrect
  2. BMultiplying the current price by the transition probability
  3. CApplying the recovery rate to the face value
  4. DUsing the bond's current yield held constant

Explanation

For each non-default state, remaining cash flows are discounted using the forward zero curve for the new rating, which embeds that rating's credit spread. Default uses recovery rate times face value. Multiplying by probability gives an expected contribution, not a state value.

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