- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 16. Credit Analysis for Corporate Issuers
- Subject 3. Seniority Rankings, Recovery Rates, and Credit Ratings
CFA Practice Question
Consider a corporate bond. Per 100 of par value, its exposure is 105, and recovery is 60. The probability of default (POD) is 1%. What is the expected loss due to credit risk?
B. 0.45
C. 0.48
A. 0.40
B. 0.45
C. 0.48
Correct Answer: B
The loss given default (LGD) per 100 of par value is exposure - recovery = 105 - 60 = 45. The expected loss is LGD x POD = 45 x 1% = 0.45.
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