Jy88

04-18-2009, 07:01 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.