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 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 >>
  2. 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 >>
  3. What are some classes I can take to prepare for the Series 6 exam?

    Learn about how the risk-return tradeoff applies to bond yields, and the different types of risks associated with investing ... Read Answer >>
  4. What is the difference between student loan default and delinquency?

    Learn the differences between simply becoming delinquent on your student loans vs. actually defaulting on your student loan ... Read Answer >>
  5. Does a good credit rating guarantee repayment?

    Learn how credit ratings help investors determine the creditworthiness of an issuer and the risk associated with making an ... 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. Financial Advisor

    Junk Bond

    Find out more about these bonds that have a high risk of default.
  3. 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?
  4. Investing

    How Credit Rating Risk Affects Corporate Bonds

    Credit migration risk is a vital part of the credit risk assessment, specifically with regard to corporate bonds which underlie numerous rating changes.
  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

    Chesapeake’s Default Adds to Global Total (CHK)

    S&P downgrades Chesapeake Energy's senior notes to 'default' because of the company's debt for equity exchange—global default total grows as a result.
  7. Investing

    Sinking Fund

    A sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. By eliminating its debt gradually, the bond issuer is more likely to attract investors concerned ...
  8. Financial Advisor

    How Trump’s Debt Plan Would Hammer U.S. Savers

    Some experts say that Trump's economic proposals for the U.S. have the potential to send the markets into a deep tailspin. Here's why.
  9. Investing

    U.S. Oil Defaults Up Despite Stable Oil Price (USO, OIL)

    U.S. oil and gas default rates surpass last year's total despite oil price relief.
  10. Investing

    Junk Bonds: Does High Yield Equal Extreme Risk?

    High-yield bonds present a lot of risks but do they outweigh the rewards? Here are some ETFs to consider, with caution.
RELATED TERMS
  1. Temporary Default

    A bond rating that suggests the issuer might not make all of ...
  2. Default

    1. The failure to promptly pay interest or principal when due. ...
  3. Strategic Default

    A deliberate default by a borrower. As the name implies, a strategic ...
  4. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  5. Default Risk

    The event in which companies or individuals will be unable to ...
  6. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
Hot Definitions
  1. Life Insurance

    A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the ...
  2. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  4. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
Trading Center