10
Mar
PD implied yield [practice, credit]
by David Harper, CFA, FRM, CIPM
Please note the source referenced in the sample exam is incorrect so this may not really apply to L1 FRM but rather L2 FRM - David
27. A risk analyst seeks to find out the credit-linked yield spread on a BB-rated, 2-year zero coupon bond issued by a multinational petroleum company. If the prevailing annual risk-free rate is 3%, the default rate for BB-rated bonds is 7% per year, and the loss given default is 60%, then the yield-to-maturity of the bond is [source: FRM 2010 practice exam]:
- a. 2.57%
- b. 5.90%
- c. 7.45%
- d. 7.52%
[my adds]
27.2 What is the bond’s yield under continuous compounding?
27.3 Test the outcome with Hull’s approximation that relates PD, spread and recovery rate.
Answers:
Similar question for more practice
- A tough workout question from last year: Implied LGD from bond rates
- A sample question from last year that utilizes Hull’s approximation
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