关于recovery risk

问题如下：

Question: 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%?

选项：

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.

解释：

Explanation:

D is correct. The recovery rate for a bond is usually defined as the value of the bond shortly after default and it is expressed as a percentage of its face (par) value. It can be thought of as the amount of the obligation the lender can expect to recover if the firm defaults.

A is incorrect. This would correspond to a 35% recovery rate if, in the event of bankruptcy, liquidation of the firm’s assets would result in the bank receiving 35% of the face value of the bond.

B is incorrect. This would correspond to a 35% recovery rate if, given that a collateralized bond defaults, the bank would take possession of collateral valued at 35% of the bond’s face value.

C is incorrect. Recovery rate is defined as described in the explanation for D above, and is a conditional probability (conditional on a default occurring).

Section: Valuation and Risk Models

Learning Objective:

Define recovery rate and calculate the expected loss from a loan.

Reference: Global Association of Risk Professionals. Valuation and Risk Models. New York, NY: Pearson, 2022. Chapter 4. External and Internal Credit Ratings.