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An investor holds a portfolio of $100 million. This portfolio consists of A-rated bonds ($40 million) and BBB-rated bonds ($60 million). Assume that the one-year
An investor holds a portfolio of $100 million. This portfolio consists of A-rated bonds ($40 million) and BBB-rated bonds ($60 million). Assume that the one-year probabilities of default for A-rated and BBB-rated bonds are 1% and 2%, respectively, and that they are independent. If the recovery value for A-rated bonds in the event of default is 70% and the recovery value for BBB-rated bonds is 45%, what is the one-year expected credit loss from this portfolio?
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