Jy88
04-18-2009, 06:01 AM
For question 7 part b,
The credit spread = {LGD*Q*(1+R)}/(1-Q*LGD)
However, the solution gives, (1-LGD)*Q*(1+R)/(1-Q*LGD)
Would like to check with someone and verify that this solution is wrong?
Also, the solution gives credit spread = 16.83bp, I could not seem to get this answer.
Given if LGD = Q*(1-Recovery Rate) = 32bp*(1-50%)=16bp
Risk Free rate = 5%.
When I substitue, gives me credit spread of 5.66% instead of the one in solution of 16.83bp.
Anyone have any ideas on this?
Thank you very much.
The credit spread = {LGD*Q*(1+R)}/(1-Q*LGD)
However, the solution gives, (1-LGD)*Q*(1+R)/(1-Q*LGD)
Would like to check with someone and verify that this solution is wrong?
Also, the solution gives credit spread = 16.83bp, I could not seem to get this answer.
Given if LGD = Q*(1-Recovery Rate) = 32bp*(1-50%)=16bp
Risk Free rate = 5%.
When I substitue, gives me credit spread of 5.66% instead of the one in solution of 16.83bp.
Anyone have any ideas on this?
Thank you very much.