Question

Please answer the following questions from A through C:

A report from Fitch data service states the following two facts: • In 2002, the volume of defaulted US high-yield debt was $ 109.8 billion. The average market size of the high-yield bond market during 2002 was $669.5 billion. • The average recovery rate for defaulted US high-yield bonds in 2002 (defined as average price one month after default) was $ 0.22 on the dollar. Address the following three tasks: A. On the basis of the first fact given above, calculate the default rate on US high-yield debt in 2002. Interpret this default rate as a probability.

B. State the probability computed in Part A as an odd against default.

C. The quantity 1 minus the recovery rate given in the second fact above is the expected loss per $ 1 of principal value, given that default has occurred. Suppose you are told that an institution held a diversified high-yield bond portfolio in 2002. Using the information in both facts, what was the institution’s expected loss in 2002, per $ 1 of principal value of the bond portfolio?

Answer 1

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