Question 1 (10 marks) Referring to Table 1, we consider a portfolio of three bonds: A,...

 

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Question 1 (10 marks) Referring to Table 1, we consider a portfolio of three bonds: A, B and C with various probabilities of default. Assuming that (1) the credit exposures are constant, (2) the recovery rate in case of default is 0.3, and (3) default events are independent across the three issuers. Table 1. Bond portfolio Credit exposure $25 million $30 million $45 million Bond A B C Answer all the following sub-questions: (a) Calculate the probability of event wherein none of the bonds default. [1 mark] (b) Calculate the probability of event wherein bond A defaults and the others do not.[1 mark] (c) Calculate the probability of event wherein both bonds A and B default and bond C does not. [1 mark] [1 mark] (d) Calculate the expected credit loss of the portfolio. (e) Assuming the standard deviation of the credit loss is $22 million, calculate the 95% VaR and unexpected loss of the portfolio. Use N (95%) = 1.65. [3 marks] (f) Assuming the cumulative credit loss distribution is continuous, sketch a cumulative credit loss distribution to show the expected loss, 95% VaR and unexpected loss. [3 marks] Suggested formula: P(A and B) = P(A) > p(B) E[CL] = P x E[CE] E[LGD}] i=1 Default probability (p) 0.15 0.15 0.20 VaR=u+oN'(X) Question 1 (10 marks) Referring to Table 1, we consider a portfolio of three bonds: A, B and C with various probabilities of default. Assuming that (1) the credit exposures are constant, (2) the recovery rate in case of default is 0.3, and (3) default events are independent across the three issuers. Table 1. Bond portfolio Credit exposure $25 million $30 million $45 million Bond A B C Answer all the following sub-questions: (a) Calculate the probability of event wherein none of the bonds default. [1 mark] (b) Calculate the probability of event wherein bond A defaults and the others do not.[1 mark] (c) Calculate the probability of event wherein both bonds A and B default and bond C does not. [1 mark] [1 mark] (d) Calculate the expected credit loss of the portfolio. (e) Assuming the standard deviation of the credit loss is $22 million, calculate the 95% VaR and unexpected loss of the portfolio. Use N (95%) = 1.65. [3 marks] (f) Assuming the cumulative credit loss distribution is continuous, sketch a cumulative credit loss distribution to show the expected loss, 95% VaR and unexpected loss. [3 marks] Suggested formula: P(A and B) = P(A) > p(B) E[CL] = P x E[CE] E[LGD}] i=1 Default probability (p) 0.15 0.15 0.20 VaR=u+oN'(X)

Answer rating: 100% (QA)

The problem presented is related to finance and is associated with the risk assessment of a bond portfolio comprising bonds A B and C Lets solve the questions step by step a Calculate the probability ... View the full answer