exam 3, yields and cumulative default probability

[Anonymous]

Hello everyone,

Could you please provide the relevant formula in order to calculate the Cumulative Probability of Default in the question below?

Many Thanks..

A 5-year U.S.Treasury strip has a yield of 6% and a 5-year zero issued by GK Inc, rated A by S&P, has 7% (semi-annual compounding both). Assuming a Loss Given Default 55% . What is the cumulative probability of GK Inc, defaulting during next 5 years?

[George]

exam 3, yields and cumulative default probability

[Anonymous]

no problem, its ok now, i dont need an answer. thanks anyway.

[Anonymous]

hello, George.

which answer did you get?

Thanks

[Anonymous]

Kenny,

if we denote

CD: Cumulative Probability of Default
y* = 0.07
y = 0.06
LGD= 0.55

then, by the equation: (1+y/2)^10 = [(1+y*/2)^10]*(1-CD*LGD)

we could get the asked CD.

Good studying.

[Author]

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