A:
In the beginning of this year, the total par value of all CCC-rated bonds were $12 billion while the total number of issuers was 22,500. If during the year, 1,200 issuers defaulted on a total of $1.3 billion worth of debt obligations. If investors were eventually paid a total of $625 million of the total amount in default, which of the following statements would be inconsistent with this situation?
a) The dollar default rate was 10.8%.
b) The issuer default rate was 5.3%
c) The cumulative default rate will always be higher than the default rate for any given year.
d) The default loss rate during the year was 48.1%.
The correct answer is: d)
(i) Default Loss Rate = [($1.3 billion - $625 million)/$1.3 billion] = 51.9%
(ii) Dollar Default Rate = ($1.3 billion/$12 billion) = 10.8%
(iii) Issuer Default Rate = (1,200/22,500) = 5.3%
2006 CFA Level 1 LOS: 14.63.i

RELATED FAQS
  1. What level of default rate is typical for the credit services industry?

    Learn how default rates affect businesses in the credit services industry, and what rates are considered normal for a company ... Read Answer >>
  2. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  3. What factors are taken into account to quantify credit risk?

    Learn how probability of default, or PD; loss given default, or LGD; and exposure at default, or EAD, are used to help quantify ... Read Answer >>
  4. What happens when a company defaults on its commercial paper obligations?

    Read about the possible consequences of a large corporation defaulting on its commercial paper obligations even though the ... Read Answer >>
  5. What are some examples of risks associated with financial markets?

    Find out about the different types of risks for different classes of assets including volatility, counterparty risk and default ... Read Answer >>
Related Articles
  1. Taxes

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  2. Insights

    Why and When Do Countries Default?

    Countries can default on their debt. This happens when the government is either unable or unwilling to make good on its fiscal promises.
  3. Financial Advisor

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  4. Investing

    High-Yield Bond ETFs: 3 Reasons to Avoid Them

    Examine high-yield bond performance in 2016. Why do rising default rates, falling recovery rates and Fed rate hikes make these securities worth avoiding?
  5. Personal Finance

    What Happens in a Default?

    Borrowers are in default when they don’t honor a debt, whether their failure is intentional or not.
  6. Investing

    Junk Bonds’ Performance After the Financial Crisis

    How did higher-yielding bonds perform during and after the financial crisis of 2007-2009?
  7. Investing

    2 ETFs That Will Hurt From Rising Default Rates (HYG, JNK)

    Learn about two high-yield bond ETFs that could be adversely affected if the trend of increasing corporate default rates continues.
  8. Insights

    The History Of Greek Sovereign Debt Defaults

    This isn't the first time Greece has been in financial trouble. Here's a brief history of the country's money woes.
  9. Investing

    Understand the Security Types of Corporate Bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
RELATED TERMS
  1. Strategic Default

    A deliberate default by a borrower. As the name implies, a strategic ...
  2. Default Premium

    The additional amount a borrower must pay to compensate the lender ...
  3. Credit Default Insurance

    The use of a financial agreement - usually a credit derivative ...
  4. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  5. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
  6. Constant Default Rate - CDR

    An annualized rate of default on a group of mortgages, typically ...
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center