Explanation

Credit Valuation Adjustment (CVA) is the adjustment made to the value of a derivative or bond to account for counterparty credit risk. It represents the market value of counterparty credit risk.

Key relationships:

• CVA and Price: CVA is subtracted from the risk-free value of a bond to get its fair value. Therefore, as CVA increases, the bond's price decreases.

• CVA and YTM: As CVA increases and price decreases, the yield to maturity (YTM) increases, not decreases.

• CVA and Credit Risk: CVA itself is a measure of credit risk, so as CVA increases, it indicates higher credit risk, not lower.

Mathematical relationship: Fair Value = Risk-Free Value - CVA

When CVA increases (due to higher counterparty default risk), the fair value (price) decreases. Therefore, as the credit valuation adjustment increases, there is a decrease in the bond's price.