Question of the Week

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%.

Answer:

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