Credit risk

1. Example Index
Copyright 2018 CapitaLogic Limited
Example Description Excel technique
1 Term loan
2 Credit card
3 Mortgage
4 Stress testing on monthly mortgage payment
5 Corporate bond
6 Average EAD
7 Statistics on LGD
8 Accrued interest
This Excel workbook is prepared in accordance with
Chapter 2 of the text book
"Managing Credit Risk Under The Basel III Framework, 3
rd
ed"
Authored by : Dr. LAM Yat-fai (林日辉)
Principal, Structured Products Analytics, CapitaLogic Limited
Adjunct Professor of Finance, City University of Hong Kong
Doctor of Business Administration
CFA, CAIA, CAMS, FRM, PRM
Website: https://sites.google.com/site/crmbase
E-mail: crmbasel@gmail.com
Copyright 2018 CapitaLogic Limited

2. Example 1 Term loan
Principal 10,000 Month Cash flow EAD
Interest rate 12% 0 -10,000
Maturity 36 months 1 100 10,100
2 100 10,100
3 100 10,100
4 100 10,100
EAD 10,100 5 100 10,100
LGD 90% 6 100 10,100
PD 3% 7 100 10,100
RM 3 year 8 100 10,100
9 100 10,100
EL 794 10 100 10,100
1-year EL 273 11 100 10,100
12 100 10,100
13 100 10,100
14 100 10,100
15 100 10,100
16 100 10,100
17 100 10,100
18 100 10,100
19 100 10,100
20 100 10,100
21 100 10,100
22 100 10,100
23 100 10,100
24 100 10,100
25 100 10,100
26 100 10,100
27 100 10,100
28 100 10,100
29 100 10,100
30 100 10,100
31 100 10,100
32 100 10,100
33 100 10,100
34 100 10,100
35 100 10,100
36 10,100 10,100
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3. Example 2 Credit card
Credit limit 4,000
Interest rate 20%
Month Expense Interest Payment Balance Minpay
1 1,702 1,702 170 EAD 4,000
2 2,298 28 1,702 2,326 233 LGD 100%
3 1,674 39 1,262 2,777 278 PD 3%
4 1,223 46 278 3,769 377
5 231 63 3,769 294 100 1-year EL 120
6 3,706 5 294 3,711 371
7 289 62 3,711 351 100
8 3,649 6 351 3,655 365
9 345 61 3,655 406 100
10 3,594 7 406 3,601 360
11 399 60 3,601 459 100
12 3,541 8 459 3,548 355
Copyright 2018 CapitaLogic Limited

4. Example 3 Mortgage
Property price 1,000,000
Mortgage amount 700,000
Interest rate 3%
Maturity 20 years
Month Outstanding
principal
Principal
payment
Interest
payment
Monthly
payment
EAD Default loss
1 700,000 2,132 1,750 3,882 701,750 0 Average EAD 689,895
2 697,868 2,138 1,745 3,882 699,612 0 LGD 0%
3 695,730 2,143 1,739 3,882 697,470 0 PD 3%
4 693,587 2,148 1,734 3,882 695,321 0
5 691,439 2,154 1,729 3,882 693,168 0 1-year EL 0
6 689,286 2,159 1,723 3,882 691,009 0
7 687,127 2,164 1,718 3,882 688,844 0
8 684,962 2,170 1,712 3,882 686,675 0
9 682,793 2,175 1,707 3,882 684,500 0
10 680,617 2,181 1,702 3,882 682,319 0
11 678,437 2,186 1,696 3,882 680,133 0
12 676,251 2,192 1,691 3,882 677,941 0
Copyright 2018 CapitaLogic Limited

5. Example 4 Stress testing on mortgage
Property price 1,000,000
Mortgage amount 700,000 Current Stress add-on
Stressed interest rate 5% 3% 2%
Maturity 20 years
Month Outstanding
principal
Principal
payment
Interest
payment
Monthly
payment
1 700,000 1,703 2,917 4,620
2 698,297 1,710 2,910 4,620
3 696,587 1,717 2,902 4,620
4 694,870 1,724 2,895 4,620
5 693,145 1,732 2,888 4,620
6 691,414 1,739 2,881 4,620
7 689,675 1,746 2,874 4,620
8 687,929 1,753 2,866 4,620
9 686,175 1,761 2,859 4,620
10 684,415 1,768 2,852 4,620
11 682,647 1,775 2,844 4,620
12 680,872 1,783 2,837 4,620
Copyright 2018 CapitaLogic Limited

6. Example 5 Corporate bond
Day Regular Accrued
1 0.0165 LGD 60%
2 0.0330 PD 3%
3 0.0495
4 0.0659 Hazard rate 3.05%
5 0.0824 Daily hazard rate 0.0084%
6 0.0989 Normal [0,1] 0.9999
7 0.1154 Survival period ########
8 0.1319
9 0.1484 Principal 100
10 0.1648 RM 5
11 0.1813 Interest rate 6%
12 0.1978 Interest frequency 2
13 0.2143 No. of days between interests 182
14 0.2308 Daily accrued interest 0.0165
15 0.2473
16 0.2637 Default day 106687
17 0.2802 Within the RM? No
18 0.2967 Accrued interest
19 0.3132 EAD
20 0.3297
21 0.3462
22 0.3626
23 0.3791
24 0.3956
25 0.4121
26 0.4286
27 0.4451
28 0.4615
29 0.4780
30 0.4945
Interest
Copyright 2018 CapitaLogic Limited

7. Example 6 Average EAD
Principal 1,000
Interest rate 6%
Interest frequency 2
Maturity 31 Dec 2021
Today 31 Dec 2016
Year Cash flow
30 Jun 2017 30
31 Dec 2017 30
30 Jun 2018 30
31 Dec 2018 30
30 Jun 2019 30
31 Dec 2019 30
30 Jun 2020 30
31 Dec 2020 30
30 Jun 2021 30
31 Dec 2021 1,030
Average EAD 1,015
LGD 60%
PD 3%
RM 5
EL 86.03
1-year EL 18.27
Copyright 2018 CapitaLogic Limited

8. Example 7 Statistics on LGD
Year Overall
Secured Unsecured Senior
2016 56.57% 68.70% 63.28% 75.50% 64.99%
2015 45.25% 62.44% 63.40% 41.46% 59.38%
2014 26.44% 53.91% 60.92% 61.22% 52.09%
2013 31.91% 55.02% 79.29% 73.64% 53.87%
2012 42.41% 56.72% 66.25% 62.65% 55.49%
2011 29.55% 58.69% 63.34% 68.11% 54.30%
2010 42.37% 49.31% 62.50% 66.34% 48.54%
2009 62.70% 63.46% 76.90% 54.69% 66.18%
2008 47.54% 66.47% 76.68% 70.53% 65.88%
2007 17.69% 46.35% 43.85% 44.94%
2006 25.37% 44.98% 58.59% 43.89% 44.98%
2005 30.80% 45.12% 67.23% 48.75% 43.48%
2004 26.75% 47.91% 57.67% 6.00% 41.50%
2003 30.80% 58.13% 62.18% 87.69% 58.63%
2002 49.38% 70.47% 78.61% 76.60% 70.51%
2001 68.26% 78.76% 80.19% 84.06% 78.42%
2000 60.79% 75.84% 79.25% 68.14% 74.76%
1999 60.86% 61.98% 73.09% 64.36% 65.69%
1998 53.18% 60.47% 55.01% 81.81% 61.70%
1997 28.00% 43.90% 55.27% 66.90% 52.44%
1996 52.42% 37.25% 56.25% 77.40% 58.46%
1995 37.98% 52.40% 65.70% 58.46% 56.72%
1994 30.75% 46.27% 70.39% 61.99% 54.43%
1993 62.87% 48.09% 55.85% 56.92%
1992 37.95% 50.81% 50.60% 61.96% 54.11%
1991 51.61% 63.34% 58.18% 75.58% 64.49%
1990 66.19% 61.84% 74.47% 80.50% 74.20%
1989 53.46% 56.43% 64.28% 73.19% 67.46%
1988 44.61% 54.76% 68.59% 66.23% 61.46%
1987 29.00% 36.25% 53.50% 53.12% 48.70%
Senior Subordinated
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9. Example 8 Accrued interest
Principal 1,000
Interest rate 6%
Interest frequency 2
Maturity 31 Dec 2021
Today 31 Mar 2017
Day count convention Basis Accrued interest
30/360 0 15
Actual/Actual 1 14.91712707
Actual/360 2 15
Actual/365 3 14.79452055
Copyright 2018 CapitaLogic Limited