CAS Exam 7 Spring 2013, Question 14
Study guide: Exam 9
Given the following bond portfolio for an insurance company:
| Years to Maturity | Bond Rating | Credit Risk Solvency Capital Requirement ($000) | Bond Issuer's Current Annual Default Probability | |
|---|---|---|---|---|
| Bond 1 | 1 | BBB | 45 | 0.2% |
| Bond 2 | 3 | BBB | 157 | 0.2% |
Assume that the best diversification can be approximated by correlation coefficients of 0.5.
Part a (1.5 points)
Identify and briefly describe three sources of credit risk that may be associated with this bond portfolio.
Part b (0.75 points)
Calculate the capital requirement due to credit risk for this bond portfolio assuming that both bonds are from the same issuer.
Answer this question and see the worked solution