Problem
A portfolio consists of two bonds. The bond value, default probability, and loss given default rate are USD 1,000,000, 3% and 20% for one bond, and USD 600,000, 5%, and 30% for the other. Answer the following two questions (no calculations are required):
A. Is the information provided enough to compute the expected credit loss of the portfolio? If not, what else would you need?
B. Is the information provided enough to compute the credit VAR of the portfolio (defined as the maximum loss due to defaults at a confidence level of 99% over a one-year horizon)? If not, what else would you need?