Paper , Order, or Assignment Requirements
Question 1 (9 marks | Word limit: 250 words)
(a) Define the three (3) key contributors to evaluating a credit risk exposure. (3 marks)
- Credit Score
- Default Rate
- Recovery Rate
(b) How are these factors combined to evaluate an expected loss? (2 marks)
Loss Given default
(c) You are analysing your exposure to XYZ Pty Ltd and have been given the following information:
15yr loan owed by XYZ $7,200,000
XYZ credit rating BB
Credit ratings matrix
| Default rate | Recovery rate | |||
| 1yr | 5yr | 1yr | 5yr | |
| AA | 0.01% | 0.20% | 100.00% | 61.30% |
| A | 0.02% | 0.62% | 54.80% | 62.90% |
| BBB | 0.22% | 2.35% | 50.30% | 47.30% |
| BB | 1.41% | 12.32% | 45.20% | 43.10% |
| B | 5.88% | 30.08% | 34.40% | 38.90% |
| C | 21.27% | 57.86% | 31.90% | 35.10% |
Calculate the 1-year and 5-year expected loss on this loan. (4 marks)
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