HelloI was wondering how Moody's estimate their weighted average probability of default ? In their paper entitled "The Binomial Expansion Method Applied to CBO/CLO Analysis", available from their website www.moodys.com, they use an example in which the weighted average probability of default is 25%. In their hypotheitical example the maturity is 6 years. I am not sure how they calculate this, do they use the cumulative probability of default at the average rating of the portfoio at the appropriate maturity ? It seems to me that the avergae probability of default used in the example is much higher than would eb reasonably expected, or could be deduced from their tables.Any help, greatly appreciated.Drew

WARF must what your looking forIf I remeber well, to compute WARF for instance take the proba of default (ten years) of each bonds corresponding its ratingWARF=Sum(RFi*Ni/N)Ni nominal of each bondRFi proba of default of each bond (10 years)N total nominal

Many thanks for your help

I am still not sure how the WARF translates into an average probability of default.Thanks

QuoteOriginally posted by: liefjeWARF must what your looking forIf I remeber well, to compute WARF for instance take the proba of default (ten years) of each bonds corresponding its ratingWARF=Sum(RFi*Ni/N)Ni nominal of each bondRFi proba of default of each bond (10 years)N total nominalDon't forget to multiply the default rate by 10000 to get the RF. (ie. a bond with a 4% cumulative Default Probability would have a RF of 400). Your resultant WARF/10000 should be your expected cumulative default rate for the portfolio. You could then translate that back to get a rating (ie. look for a number equal to your portfolio default rate and see what rating category it matches up to, why do you think they force the 10 year Cumulative Rate to calc WARF??)By the way Rating Agencies are full of it.