Below is my question, my main question comes from how do they calculate the LCD of 30.525 when the formula is = 99.75 × 0.30 which gets me 29.925, am I doing something wrong?
Calculate the CVA on a 1.75%, 1-year, $100 par annual pay bond with recovery rate of 70% and probability of default of 2%. Assume that the 1-year risk-free rate is 2%.
A)
$1.89
B)
$0.59
C)
$1.12
Explanation
| Year | Exposure | LGD | PD | Expected Loss | DF | PV of Expected Loss |
|---|---|---|---|---|---|---|
| 1 | 99.75 | 29.93 | 2.00% | 0.60 | 0.9804 | 0.59 |
DF = PV of $1 using risk-free rate = 1 /1.02 = 0.9804. Exposure = 101.75/1.02 = 99.75. LCD = Exposure × (1 – recovery rate) = 99.75 × 0.30. Expected loss = LGD × PD = 30.525 × 0.02.
(Study Session 13, Module 35.1, LOS 35.a)