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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.

PAK
04-18-2009, 06:30 PM
http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=162669

Please see the middle of this thread

Jy88
04-19-2009, 05:18 AM
Thanks PAK got it!!!