Default probability can be calculated given price or price can be calculated given default probability. Default probability is the probability of default during any given coupon period. The cumulative probability of default for n coupon periods is given by 1-(1-p)n. A concise explanation of the theory behind the calculator can be found here.
- Market Price
- This is the current clean price for the bond. The price should not include accrued interest.
- Face Value
- This is the nominal value of debt that the bond represents. It is the amount that is payed to the holder of the bond on the date that it matures.
- Coupon Rate
- This determines the value of the annual coupon payments as a percentage of the face value. For example if the face value is 1000 and the interest rate is 7% then there will be total coupon payments of 70 in a year. If there are 2 payments per year then each will payment will equal 35.
- Payments per Year
- A bonds coupon payment is usually split up into a number of payments per year. The most common number is 2.
- Payments remaining
- This is the number of payments that will be made by the bond before it matures. For a 10 year bond that is 2 years old and has 2 payments per year, there will be 16 payments left till it matures.
- Recovery Rate
- This is the percentage of the face value that you expect to get paid if the bond defaults. This value can only be estimated. A good estimate for senior secured debt is 40 to 60% but it can easily be outside this range. For subordinated debt the value is often 0%.
- Risk Free Interest Rate
- This should be the yield on a U.S. treasury security with the same time left to maturity as the bond in question. You can get this value from the treasury yield curve.
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