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PV Of Expected Loss

Credit risk measures using credit spreads.  Consider Gigantic Corporation, which has promised to pay investors $10,000, 7.725 years from now. The risk-free zero-coupon yield is 1.200%. The Gigantic Corporation credit spread for payment 7.725 years from now is 0.750%.  Calculate the PV of the expected loss implied by the credit spread.

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Answer #1

=Amount/(1+risk free rate)^n-Amount/(1+risk free rate+credit spread)^n
=10000/(1+1.20%)^7.725-10000/(1+1.20%+0.750%)^7.725
=505.6248


answered by: doge
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