How high can the bond probability of default

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Reference no: EM131942814

Consider a CDO made up of six corporate bonds with par value of $100. Assume that the bonds offer no recovery value in default and that all credit events are independent. Call the first to default tranche of the CDO L1, the second L2, etc. L1 bears the first 100 of losses, L2 the next $100, etc. For a security to be considered AAA, the probability of total loss must be less than 1%. How high can the bond's probability of default be for only two tranches to be less than AAA rated ?

Reference no: EM131942814

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