Figure 1

 

The value of a bond will reflect the probability of each scenario occurring. As described in the prior piece, we use a Vasicek distribution to express these probabilities. The distribution has two parameters, an expected default rate and a correlation. For ease of understanding, the correlation can be thought of as a factor related to the standard deviation of the output. Two sample distributions are shown in figure 2.

page 2 of 5 >>>