Financial Risk Manager Part 1
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A senior trader on the fixed-income trading desk of an investment bank is presenting to a group of newly hired analysts on key drivers of credit risk. The trader illustrates the concept of recovery rates using a scenario of a bank buying a corporate bond. Which of the following would the trader be correct to identify as an example of a corporate bond that is held by the bank and has a recovery rate of 35%?
A
If the corporate issuer becomes insolvent, liquidation of the issuer's assets would result in the bank receiving 35% of the price it initially paid for the bond.
B
If the corporate issuer defaults on a collateralized bond, the bank would take possession of an amount of collateral valued at 65% of the bond's face value.
C
At the time the bank purchases the bond, there is a 65% unconditional probability that the corporate issuer will not make full and timely payments on the bond.
D
If the corporate issuer defaults on the bond, the value of the bond shortly after default is expected to equal 35% of the bond's par value.