For example, Expected loss = 0.8% and credit spread = 0.9%.
And curriculum states that:“Investors earn a 90 bps spread per year and have an expected loss of 80 bps per year.”
if we see the equation of expected loss = Default probability x LGD.
So we don’t see any per year in the equation.
Could please anyone explain this for me?
Not quite sure what you are getting at butin the credit spread equation we should see
Excesssnpread Return = Excess spread x t - (eff spread Dur x ch.spread) - (POD x LGD) x t
were t is a fraction of the year assuming other figures are expressed on an annual basis.
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Because the equation in the curriculum doesn’t have any t that you mention.
Here is an example to show what i mean
Assume the prob of defaut = 1% is an annual number.
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They have the same error in the Level III curriculum.
That term should be multiplied by t.
I’ll be contacting CFA Institute about the Level III error; I’ll mention it for Level I as well.
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Thank you all very much!
My pleasure.