Question $3(20$ marks$)$

A Financial Institution has an A$-$rated $4-$year senior subordinated zero$-$coupon bond

with face value $$1$ million and current yield $3\mathrm{.}2\%.$ The Financial Institution has

estimated the one$-$year transition matrix as in Table $1,$ the current one$-$year forward

zero curves as in Table $2,$ and the recovery rates as in Table $3.$

$(20$ marks$)$ Using the CreditMetrics model, what is the I$-$year $99\%$ Credit VaR of

this single bond?

Table $1$: One$-$year Transition Matrix $(\%)$

Table $2$: One$-$year Forward Zero Curves by Credit Rating Categories $(\%)$

Table $3$: Recovery Rate by Seniority Class $(\%$ of Face Value$)$