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

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

Quizplus · Accepted Answer

The 90%-VaR is the maximum possible loss that can occur with a probability of 10%. In this case, the maximum possible loss is $40, which occurs with a probability of 0.04.

You Invest $100 in a Corporate Bond