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 regulation to have 100% recovery rates (LGD = 0).
- 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 for investment-grade securities.
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