Given a Financial Institution whose assets, basically loans, are represented by cash flows to be received from year 1 to year 5

 Therefore the institution expects to receive the following cash flows per year from the outstanding loans (Cash Flow Map) 

Year 1 €200 Million

Year 2 €175 Million

Year 3 €200 Million

Year 4 €150 Million

Year 5 €130 Million

 

Those loans have been given to an specific client segment with a rating that implies that a credit spread of 125 basis points should be added to the Risk Free Zero Coupon Curve

That spread has been computed using Spread = Expected Default Rate (1 - Recovery)

 

The current Risk-Free Zero Coupon Curve is 

1 year Zero Coupon Rate 1%

2 year Zero Coupon Rate 2%

3 year Zero Coupon Rate 2,5%

4 year Zero Coupon Rate 3%

5 year Zero Coupon Rate 3,5%

 

What is the value of the assets if the clients rating has worse so that its default rate makes the spread to go from 125 until 525 basis points?

Answer rating: 100% (QA)

To calculate the value of the assets we need to discount the expected cash flows using the updated c... View the full answer