CreditMetrics

1. Given the Treasury spot zero-coupon yield curve below:

Spot Yield
3%
2%
1%

Term
1 year 2 years

3 years

Construct the forward curve. Then construct the spot yield curve expected in one
year.
Given these spreads, listed by year (column) and by rating (row): Complete the
table below of payments to be made on the bond at the end of of the first, second
and third years, if the bond is rated C
Forward Spreads
Spot
Second
Third
at the end of the year:
by Credit
Year
Year
Year
A

1.0%

1.5%

2%

1.5%

2%

2.5%

2%

2.5%

3%

Default

Now
Payment
Discount factor
Present Value
of Payment

One year
later

Two years
later

Using the table of outcomes and their probabilities below:

Bond Values in One Year and

Probablities
Outcome

Value

Probability

$105

0.1

$100

0.6

$95

0.1

Default

$40

0.2

Complete the table.

Rating

Value

Probability

Value minus
Value Probability
Average

Outcome
A

$105

$100

$95

Default

$40

Weighted Average

Difference Squared

Probability

0.1x$3025
$95

Construct the outcomes graph.

Define a bad day and measure Value at Risk.

Variance

$472.5

Standard
Deviation

$22