credit spread - continuous compounding question

[mbbx5va2]

Hi

There was a question like calculate credit spread and express in continuous compounding. I believe they wanted us to use FRM I material for an FRM 2 question.
If the credit spread is 3% then how would one express in terms of continuous compounding??

thx

 

[David Harper CFA FRM]

Hi @mbbx5va2 It is unwise to opine without context, but in general, you can apply the typical discrete or continuous translations such that a credit spread of 3.0% per annum with annual compounding is equal to ln(1+3%) = 2.9559%. See example here from GARP mock at https://forum.bionicturtle.com/threads/2019-43-78-with-non-zero-rr.22387/

 

[mbbx5va2]

Hi @mbbx5va2 It is unwise to opine without context, but in general, you can apply the typical discrete or continuous translations such that a credit spread of 3.0% per annum with annual compounding is equal to ln(1+3%) = 2.9559%. See example here from GARP mock at https://forum.bionicturtle.com/threads/2019-43-78-with-non-zero-rr.22387/

Thanks - I am aware of the translations but I think they didn't mention in the question which discrete rate the credit spread was i.e they didn't make it explicit if it was 3.0% per annum with semi-annual compounding or annual compounding. I wonder if one is meant to assume annual compounding if a credit spread is given, if so then solution is trivial

 

[LCosi6229]

Hi @mbbx5va2 It is unwise to opine without context, but in general, you can apply the typical discrete or continuous translations such that a credit spread of 3.0% per annum with annual compounding is equal to ln(1+3%) = 2.9559%. See example here from GARP mock at https://forum.bionicturtle.com/threads/2019-43-78-with-non-zero-rr.22387/

Hi - so I saw something similar on P2. It was the Merton credit spread and the provided risk-free rate was stated as a continuously compounding rate of x%, let's say 3%. I did e^.03

Hi @mbbx5va2 It is unwise to opine without context, but in general, you can apply the typical discrete or continuous translations such that a credit spread of 3.0% per annum with annual compounding is equal to ln(1+3%) = 2.9559%. See example here from GARP mock at https://forum.bionicturtle.com/threads/2019-43-78-with-non-zero-rr.22387/

Hi David,
I can provide full context for a question I saw on Part 2 of the exam. The question was for calculating the Merton Credit Spread and the risk-free rate was given as “the continuously-compounded risk-free rate”. In this situation, should we apply e^rt? This is what GARP did in the practice exam (#43.) for a different question, hence the idea.
Thank you very much.

 

[LCosi6229]

Hi - so I saw something similar on P2. It was the Merton credit spread and the provided risk-free rate was stated as a continuously compounding rate of x%, let's say 3%. I did e^.03

Hi David,
I can provide full context for a question I saw on Part 2 of the exam. The question was for calculating the Merton Credit Spread and the risk-free rate was given as “the continuously-compounded risk-free rate”. In this situation, should we apply e^rt? This is what GARP did in the practice exam (#43.) for a different question, hence the idea.
Thank you very much.

@David Harper CFA FRM Hello David, was hoping to get your views. Thx.

 

[LCosi6229]

@David Harper CFA FRM Hello David, was hoping to get your vie

 

[LCosi6229]

@David Harper CFA FRM @Nicole Seaman Hello, following up again for some help. Thank you.

 

[gsarm1987]

@David Harper CFA FRM @Nicole Seaman Hello, following up again for some help. Thank you.

Hi, I can help you with your question. if I can get more context, it will be useful. in anycase, rule of thumb is to keep consistency with rates, if risk free is continuously compounded then you'll have to use a continuous compounded rate to find the spread. i hope I got your question right. feel free to write if there is more

 

[LCosi6229]

Hi, thank you. I actually just found a similar question in the old GARP materials. No need to apply log or e functions to the rate. Thanks, again. ☀️