Credit valuation adjustment

The present value of expected credit losses over a bond's life, built date by date from exposure, loss given default and probability of default. Subtracted from the default-free value to value the risky bond.

Where you will meet it

Credit valuation adjustment appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain expected exposure, probability of default, loss given default and the adjustment to value for credit (CVA)
  CFA Level II · Fixed Income

  “The credit valuation adjustment is the sum of each expected loss discounted at the risk-free rate, and a bond's fair value is its default-free value minus the CVA.”

• Work out a bond's value and credit spread from assumed credit risk parameters
  CFA Level II · Fixed Income

  “Value a risky bond by subtracting the credit valuation adjustment from its default-free value.”

See also

Loss given default · Present value · Probability of default

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary