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7-8. Consider a CDO made up of six corporate bonds with par value of $100. Assume that the bonds o§er no recovery value in default and that all credit events are independent. Call the Örst to default tranche of the CDO L1, the second L2; etc. L1 bears the Örst $100 of losses, L2 the next $100, etc. For a security to be considered AA, the probability of total loss must be less than 5%. How high can the bondís probability of default be for only the most junior tranche to be less than AA rated? (a) 40%; (b) 18.21%; (c) 6.62%; (d) 8.69%. 9. What recovery rate that would also make the junior tranche AA using the default prob- ability from the question 7: (a) 40%; (b) 82.3% ; (c) 65.9%; (d) 55.4%;

7-8. Consider a CDO made up of six corporate bonds with par value of $100. Assume that the bonds o§er no recovery value in default and that all credit events are independent. Call the Örst to default tranche of the CDO L1, the second L2; etc. L1 bears the Örst $100 of losses, L2 the next $100, etc. For a security to be considered AA, the probability of total loss must be less than 5%. How high can the bondís probability of default be for only the most junior tranche to be less than AA rated? (a) 40%; (b) 18.21%; (c) 6.62%; (d) 8.69%. 9. What recovery rate that would also make the junior tranche AA using the default prob- ability from the question 7: (a) 40%; (b) 82.3% ; (c) 65.9%; (d) 55.4%;

A First Course in Probability (10th Edition)
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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7-8. Consider a CDO made up of six corporate bonds with par value of $100. Assume that the bonds oşer no recovery value in default and that all credit events are independent. Call the Örst to default tranche of the CDO L1, the second L2; etc. L1 bears the Örst $100 of losses, L2 the next $100, etc. For a security to be considered AA, the probability of total loss must be less than 5%. How high can the bondís probability of default be for only the most junior tranche to be less than AA rated? (a) 40%; (b) 18.21%; (c) 6.62%; (d) 8.69%. 9. What recovery rate that would also make the junior tranche AA using the default prob- ability from the question 7: (a) 40%; (b) 82.3%; (c) 65.9%; (d) 55.4%;
Transcribed Image Text:7-8. Consider a CDO made up of six corporate bonds with par value of $100. Assume that the bonds oşer no recovery value in default and that all credit events are independent. Call the Örst to default tranche of the CDO L1, the second L2; etc. L1 bears the Örst $100 of losses, L2 the next $100, etc. For a security to be considered AA, the probability of total loss must be less than 5%. How high can the bondís probability of default be for only the most junior tranche to be less than AA rated? (a) 40%; (b) 18.21%; (c) 6.62%; (d) 8.69%. 9. What recovery rate that would also make the junior tranche AA using the default prob- ability from the question 7: (a) 40%; (b) 82.3%; (c) 65.9%; (d) 55.4%;
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