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Cumulative probability of default on risky bond

39 ratings | 17441 views
If we are given two spot rate term structures (spot rates for Treasuries and for risky corporate bond), the question is, what is the 2-year cumulative probability of default (PD)? We take THREE STEPS: 1. Compute 1-year forward rates; 2. Compute marginal probability of defaults; 3. Compute the 2-year cumulative probability of default
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Text Comments (4)
test (1 year ago)
how about just using 2yr spot rates? 1.05/1.07=0.9813 (0.9813)^2=0.9630 1-0.9630=0.0370, like the answer in the video?
Nicolas Jaisson (1 year ago)
Have the formulas used for the claculation of the probability of default aything to do with the life of the bond in the real world? The theories used as basis for the credit risk assessment are totally fictional. In the real life, any trader knows that this bogus mathematics are irrelevant to predict the future.
roycons (7 years ago)
very intuitive presentation...
rediromasuperstar (7 years ago)
Actually i'm preparing a public selection as a financial statistician at the bank of italy. I find this exercise very helpful indeed! Thanks a lot bionic turtle!

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