Discount basis and Probability of Default: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Kmacharla
No edit summary
 
imported>Doug Williamson
(Amend link.)
 
Line 1: Line 1:
This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).
(PD).


For example when an instrument is quoted - on a <u>discount basis</u>, one period before its maturity - at a discount of 10% per period, this means that it is currently trading at a price of 100% LESS 10% = 90% of its terminal value.
Probability of Default means an assessment of the probability that the counterparty to a loan will default within a specified timeframe, usually one year.


(The periodic ''yield'' on this instrument is 10%/90% = 11.11%.  So if the same instrument had been quoted on a <u>yield basis</u>, then the quoted yield per period = 11.11%.)


The relationship between the periodic discount rate (d) and the periodic yield (r) is:
== See also ==
r = d/[1-d]


So in this case:
* [[Credit rating]]
r = 0.10/[1 - 0.10 = 0.90] = 11.11%
* [[Default]]
 
* [[Expected Loss]]
== See also ==
* [[Exposure At Default]]
* [[Discount instruments]]
* [[IRB]]
* [[Discount rate]]
* [[Loss Given Default]]
* [[Sterling commercial paper]]
* [[US commercial paper]]
* [[Yield basis]]

Revision as of 16:17, 12 November 2016

(PD).

Probability of Default means an assessment of the probability that the counterparty to a loan will default within a specified timeframe, usually one year.


See also

Retrieved from ‘https://wiki.treasurers.org/w/index.php?title=Discount_basis&oldid=38544’