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


  1. The Chairman of Bright Star Life and Casual had a meeting with his broker this afternoon ...

    The correct answer is b) Insider trading would include information that is material and non-public. Certainly, a poor earnings ...
  2. Which statements about common shareholder rights are FALSE? I. A shareholder may ...

    The correct answer is a. I should be the the other way around: convertible bond holders can exchange their bonds for shares. ...
  3. If ABC Company had the following Income Statement figures, what is the Operating ...

    The correct answer is c): The operating margin is a very useful test of the efficiency of corporate management. Operating ...
  4. A customer sells a 6% corporate bond on Tuesday October 4th for regular settlement ...

    Free info on financial certification exams including study guides, exam questions, and much more!
  1. No results found.

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!