Estimate credit VaR for risky bond

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Reference no: EM132028598

1) A risk analyst is trying to estimate the credit VaR for a risky bond. The credit VaR is defined as the maximum unexpected loss at a confidence level of 99.9% over a one-month horizon. Assume that the bond is valued at $1,000,000 one month forward, and the one-year cumulative default probability is 2% for this bond. What is the credit VaR for the bond, assuming no recovery?

2) Mr. Rosenqvist, asset manager, holds a portfolio of 100 million, which consists of BBB-rated bonds. Assume that the one-year probability of default is 7%, the recovery rate is 60%, and defaults are uncorrelated over years.

Required

• The one-year expected credit loss on Mr. Rosenqvist’s portfolio

• The three -year expected credit loss on Mr. Rosenqvist’s portfolio

3) Credit risk includes three risk factors. Please list them and also illustrate their definition.

4) Justify the statement “credit losses only occur at the event of default”. Is this true? why?

Reference no: EM132028598

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