Credit Analysis Models - Reading 35

Question 1

what is probability of default

Answer 1

likehood of default occurring in a given year

PD_t=hazard rate x PS_(t-1)

Question 2

what is hazard rate

Answer 2

initial probability of default

Question 3

what is probability of default

Answer 3

PS_t=(1-hazard)^t

Question 4

what is loss given default

Answer 4

LGD=loss_severity x exposure

Question 5

what is the expected loss for any period

Answer 5

LGD x PD

Question 6

what is the present value of the expected loss

Answer 6

the largest price one would be willing to pay on a bond to a third party to entirely remove credit risk

Question 7

what is the credit valuation adjustment

Answer 7

the sum of the expected loss for each period

CVA=price of risk-free bond - price of risky bond

Question 8

for whom is credit scoring

Answer 8

individuals and small business

Question 9

for whom is credit ratings

Answer 9

companies, governments and ABS’s

Question 10

how to calculate the expected return on a bond given transition in its credit

Answer 10

delta_%_P=-modified_duration x delta_spread