Question
If recovery rate falls and exposure is unchanged, what happens to LGD and expected loss?
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Answer
LGD rises, so expected loss rises.
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Question
If two bonds have the same PD but one has lower recovery, which should have the wider spread?
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Answer
The bond with lower recovery.
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Question
What is the basic distinction between investment-grade and speculative-grade debt?
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Answer
Investment-grade has lower credit risk; speculative-grade has higher credit risk.
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Question
Why can an issue rating differ from the issuer rating?
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Answer
Different debt issues can have different recovery prospects and priority.
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