You invest $100 in a corporate bond.You estimate that with probability 0.94,the corporation will pay back the promised amount of $110 at the end of one year;with probability 0.04,the corporation will default and the recovered amount will be $70;and with probability 0.02,the corporation will default and you will recover nothing.The 90%-VaR in this scenario is
A)$30
B)$40
C)$70
D)$100

Question

Quizplus · Accepted Answer

There is a 2% probability of losing your entire investment and a 6% probability of losing $30 or less.The 90%-VaR is therefore $30,that is,with probability 0.90,your losses on the portfolio will be less than $30.

You Invest $100 in a Corporate Bond