Possible corrections in study notes on Individual Loan Risk

[sridhar]

1. On page 11, you have:

Step #2: Calculate marginal probability of defaults. In year one, the implied marginal probability of repayment (p) = (1+5%)/(1+6%) such that the implied marginal PD = (1-p) = 1-(1+5%)/(1+6%) = 99.1%. Similarly, in year two, the marginal PD = 2.7%

David, if you read the text above, the red stuff refers to the PD and not the prob of repayment. Therefore the red stuff should be 0.9%.


Step #3: Calculate the cumulative PD. Cumulative PD = 1- (1st year marginal PD)(2nd year marginal PD) = 3.64%

Here the red stuff in the parens should respectively refer to 1st year marginal prob. of repayment and 2nd year marginal prob. of repayment. No? Your XLS is correct. The accompanying text above appears to be misleading....

2. On an unrelated note, on page 9, you refer to the greek symbol "gamma" but don't introduce it. Not a big deal, but as the season progresses, I plan to ditch the core reading (okay after reading it first!) and stick to your study notes for review. And I might wonder what "gamma" is....

--sridhar

 

[David Harper CFA FRM]

sridhar,

1) Yes, errors for sure! Exactly as you have it is correct.
2) I will explain on the gamma variable to update (v2)

Thanks, David

 

[sridhar]

David,

Could you post "prominently" when you update the study notes? It is likely too cumbersome (if so, forget it) but is it possible to indicate what changed -- I say this only in the interest of saving additonal trees...and reprinting only the changed pages.

--sridhar

 

[David Harper CFA FRM]

* Yes, I'll post a member blog - if i do the update in a batch, i'll likely ping with an email
* On the second...hmmm...let me see what is possible. There is likely a repagination issue anyhow, I think I can have MS word generate a list of deltas (like an errata sheet) but repag makes ad hoc page substitution difficult. So, ultimately, i think its a new document...

David