Lowest Credit Risk

[Abhijit CMA]

Hi David,
This is a problem from FRM handbook page 594:
Which of the following loans has the lowest credit risk?

 

[David Harper CFA FRM]

Hi @abhijitfrm @ShaktiRathore showed the solution for a similar problem here at https://forum.bionicturtle.com/threads/please-solve-these-questions.9942/#post-45738...

1) For Loan A we need to find 3 month PD ,1-(1-3 month PD)^4=1 year PD =>3 month PD=1-(1-1 year PD)^(1/4)=1-(1-.025)^(1/4)=.00631 =>EL(3mnths)=.00631*50%=.3155%
Loan B: 9 month PD=1-(1-1 year PD)^(.75)=1-(1-.011)^(.75)=.00826=>EL(9mnths)=.00826*65%=.5369%
Loan C: 6 month PD=1-(1-1 year PD)^(.5)=1-(1-.01)^(.5)=.0050=>EL(6 mnths)=.0050*60%=.30%
Loan D: 12 month PD=1-(1-1 year PD)^(1)=1-(1-.0075)^(1)=.0075=>EL(12mnths)=.0075*50%=0.375%
Thus the Loan C has the lowest credit risk with the lowest EL of .30%.
thanks

e.g.,
Loan A PD to maturity = 1-(1 - 1.99%)^(3/12) = 0.501%
Loan B PD to maturity = 1-(1 - 0.90%)^(9/12) = 0.676%. I hope that helps!

 

[Abhijit CMA]

Thanks David...