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 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 >>
  2. 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 >>
  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. How safe are high yield bonds?

    Learn how high-yield bonds have a greater risk of default than investment grade bonds and why they offer higher amounts of ... 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. Investing

    7 Things You Didn’t Know About Sovereign Debt Defaults

    Sovereign debt defaults are scary, but should they be? They are actually more common than you think.
  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. Financial Advisor

    Emerging Market Defaults: Beware of Second Wave

    Emerging market corporate defaults have the potential to be the biggest risk to global markets.
  6. 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.
  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. 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.
  9. Investing

    Oil Production Up, Default Rates to Rise

    A round up of some of the week's most significant corporate events and news stories in Energy.
RELATED TERMS
  1. Default Premium

    The additional amount a borrower must pay to compensate the lender ...
  2. Default Risk

    The event in which companies or individuals will be unable to ...
  3. Constant Default Rate - CDR

    An annualized rate of default on a group of mortgages, typically ...
  4. Recovery Rate

    The extent to which principal and accrued interest on a debt ...
  5. Sovereign Default

    A failure on the repayment of a county's government debts. Countries ...
  6. Asset Backed Credit Default Swap - ABCDS

    A redit default swap wherein the reference asset is an asset-backed ...
Hot Definitions
  1. Five Cs Of Credit

    A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics ...
  2. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  5. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  6. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
Trading Center