Please use the following additional information for Question…
Please use the following additional information for Questions 34-37: Suppose there are three bond ratings: A, B, C and default (D). The ratings-migration probabilities over the next year look like this for a B-rated, 3-year, 4% annual-coupon bond ($100 par value) loan: Rating in 1 year Probability A 0.03 B 0.92 C 0.03 Default 0.02 The yield on A rated bonds is 5%; the yield on B rated bonds is 6%; and the yield on a C rated bond is 9%. All term structures are flat (i.e. forward rates equal spot rates). Assume that in default you recover 50% at the time of default. Question: What is the 2% VAR?