1. On page 11, you have:
Step #2: Calculate marginal probability of defaults. In year one, the implied marginal probability of repayment (p) = (1+5%)/(1+6%) such that the implied marginal PD = (1-p) = 1-(1+5%)/(1+6%) = 99.1%. Similarly, in year two, the marginal PD = 2.7%
David, if you read the text above, the red stuff refers to the PD and not the prob of repayment. Therefore the red stuff should be 0.9%.
Step #3: Calculate the cumulative PD. Cumulative PD = 1- (1st year marginal PD)(2nd year marginal PD) = 3.64%
Here the red stuff in the parens should respectively refer to 1st year marginal prob. of repayment and 2nd year marginal prob. of repayment. No? Your XLS is correct. The accompanying text above appears to be misleading....
2. On an unrelated note, on page 9, you refer to the greek symbol "gamma" but don't introduce it. Not a big deal, but as the season progresses, I plan to ditch the core reading (okay after reading it first!) and stick to your study notes for review. And I might wonder what "gamma" is....
--sridhar
Step #2: Calculate marginal probability of defaults. In year one, the implied marginal probability of repayment (p) = (1+5%)/(1+6%) such that the implied marginal PD = (1-p) = 1-(1+5%)/(1+6%) = 99.1%. Similarly, in year two, the marginal PD = 2.7%
David, if you read the text above, the red stuff refers to the PD and not the prob of repayment. Therefore the red stuff should be 0.9%.
Step #3: Calculate the cumulative PD. Cumulative PD = 1- (1st year marginal PD)(2nd year marginal PD) = 3.64%
Here the red stuff in the parens should respectively refer to 1st year marginal prob. of repayment and 2nd year marginal prob. of repayment. No? Your XLS is correct. The accompanying text above appears to be misleading....
2. On an unrelated note, on page 9, you refer to the greek symbol "gamma" but don't introduce it. Not a big deal, but as the season progresses, I plan to ditch the core reading (okay after reading it first!) and stick to your study notes for review. And I might wonder what "gamma" is....
--sridhar