easy · FRM Part 2 Credit Risk
For a highly rated AAA corporate bond, the EL is typically very low because:
- AAA bonds are required by banking regulation to carry a 100% recovery rate, meaning LGD equals zero.
- The PD is near zero, making the product of the three factors small despite potentially high EAD.
- The Exposure at Default for AAA bonds is always lower than for speculative-grade bonds.
- EL is not calculated at all for securities holding an investment-grade rating designation.
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