Question 1

Which of the following is true

Accepted Answer

A)   Recovery rates are lower for investment grade companies
B)   Recovery rates are higher for non-investment grade companies
C)   Recovery rates are negatively correlated with default rates
D)   Recovery rates are positively correlated with default ratesE) A) and D)
F) B) and C)

Question 2

A hazard rate is 1% per annum.What is the probability of a default during the first two years?

Accepted Answer

A)   2.00%
B)   2.02%
C)   1.98%
D)   1.96%E) None of the above
F) B) and C) C

Question 3

Which of the following is true of Creditmetrics when it is used to calculate credit VaR

Accepted Answer

A)   Creditmetrics takes defaults but not downgrades into account
B)   Creditmetrics takes downgrades but not defaults into account
C)   Creditmetrics considers neither defaults nor downgrades
D)   Creditmetrics considers both defaults and downgradesE) A) and C)
F) B) and C)

Question 4

If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years

Accepted Answer

A)   0.4%
B)   1.2%
C)   1.8%
D)   2.5%E) All of the above
F) A) and B)

Question 5

The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.The recovery rate is 60%.What is closest to the unconditional default probability for the sixth year?

Accepted Answer

A)   0.04
B)   0.05
C)   0.06
D)   0.07E) All of the above
F) A) and D) C

Question 6

Which of the following is true

Accepted Answer

A)   Netting always leads to a reduction in a company's exposure to a counterparty
B)   Netting always leads to a company's exposure to a counterparty either staying the same or going down
C)   Netting always increases a company's exposure to a counterparty
D)   Netting can increase or reduce the exposureE) A) and B)
F) None of the above

Question 7

Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

Accepted Answer

A)   4.5%
B)   5.0%
C)   5.5%
D)   6.0%E) A) and B)
F) B) and C)

Question 8

Which of the following is true

Accepted Answer

A)   Downgrade triggers are particularly valuable if they are widely used by a company's counterparties
B)   Downgrade triggers become less valuable if they are widely used by a company's counterparties
C)   Downgrade triggers are useless because their impact is always anticipated by the market
D)   Downgrade triggers are a two-edged sword. If company A has a downgrade trigger for company B then company B has a downgrade trigger for company AE) A) and B)
F) B) and C)

Question 9

Which of the following is true

Accepted Answer

A)   A derivative dealer's CVA is the counterparty's DVA and vice versa
B)   Collateral posted by the counterparty reduces CVA
C)   Collateral posted by the dealer reduces DVA
D)   All of the aboveE) None of the above
F) All of the above

Question 10

Which of the following is true

Accepted Answer

A)   The Gaussian copula model assumes that the defaults of different companies are independent.
B)   The Gaussian copula model assumes that defaults, conditional on the value of a factor , are independent.
C)   The Gaussian copula model assumes that the number of defaults is normally distributed.
D)   None of the above.E) A) and B)
F) C) and D) B

Question 11

Which of the following is true

Accepted Answer

A)   The asset swap spread is a measure of excess of the bond yield over the OIS rate
B)   The asset swap spread is a measure of excess of the bond yield over the LIBOR/swap rate
C)   An asset swap exchanges the actual return on the asset for LIBOR plus a spread
D)   None of the aboveE) A) and C)
F) B) and C)

Question 12

Which of the following is true of Merton's model:

Accepted Answer

A)   The strike price is the market value of the debt
B)   The strike price is the market value of the equity
C)   The strike price is the book value of the equity
D)   The strike price is the face value of the debtE) A) and B)
F) All of the above

Question 13

Which of the following is true of Merton's model:

Accepted Answer

A)   The equity is a call option on the assets
B)   The assets are a call option on the debt
C)   The debt is a call option on the equity
D)   The equity is a call option on the debtE) A) and B)
F) A) and C)

Question 14

Which of the following is true

Accepted Answer

A)   The default probability per year for a company always increases as we look further ahead
B)   The default probability per year for a company always decreases as we look further ahead
C)   Sometimes A is true and sometimes B is true
D)   The default probability per year is roughly constant for most companiesE) None of the above
F) All of the above

Question 15

A derivatives dealer has a single transaction with a company which is a long position in a five-year option.The Black-Scholes-Merton value of the option is $6.Suppose that the credit spread on five-year bonds issued by the company is 100 basis points.What is the dealer's CVA per option purchased from the counterparty?

Accepted Answer

A)   $0.19
B)   $1.19
C)   $0.29
D)   $1.29E) A) and B)
F) A) and C)

Question 16

To be investment grade,a company has to have a credit rating of

Accepted Answer

A)   AA or better
B)   A or better
C)   BBB or better
D)   BB or betterE) All of the above
F) B) and D)

Question 17

In the Gaussian copula model which of the following is true

Accepted Answer

A)   The time to default for a company is assumed to be normally distributed.
B)   The time to default for a company is assumed to be lognormally distributed
C)   The time to default for a company is transformed to a normal distribution
D)   The time to default for a company is transformed to a lognormal distributionE) All of the above
F) None of the above

Question 18

Which of the following is true?

Accepted Answer

A)   Risk neutral default probabilities are usually much lower than real world default probabilities
B)   Risk neutral default probabilities are usually much higher than real world default probabilities
C)   Risk neutral and real world probabilities must be close to each other if there are to be no arbitrage opportunities
D)   Risk-neutral default probabilities cannot be calculated from CDS spreadsE) None of the above
F) A) and C)

Question 19

Which of the following is true

Accepted Answer

A)   Conditional default probabilities are at least as high as unconditional default probabilities
B)   Conditional default probabilities are at least as low as unconditional default probabilities
C)   Conditional default probabilities are sometimes lower and sometimes higher than unconditional default probabilities.
D)   There is no difference between conditional and unconditional default probabilities because a company can only default once.E) All of the above
F) C) and D)

Question 20

Which of the following is usually used to define the recovery rate of a bond?

Accepted Answer

A)   The value of the bond immediately after default as a percent of its face value
B)   The value of the bond immediately after default as a percent of the sum of the bond's face value and accrued interest
C)   The amount finally realized by a bondholder as a percent of face value
D)   The amount finally realized by a bondholder as a percent of the sum of the bond's face value and accrued interestE) All of the above
F) None of the above

Exam 24: Credit Risk

Which of the following is true

Correct Answer
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A hazard rate is 1% per annum.What is the probability of a default during the first two years?

Correct Answer
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C

Which of the following is true of Creditmetrics when it is used to calculate credit VaR

Correct Answer
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If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years

Correct Answer
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The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.The recovery rate is 60%.What is closest to the unconditional default probability for the sixth year?

Correct Answer
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C

Which of the following is true

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Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

Correct Answer
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Which of the following is true

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Which of the following is true

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Which of the following is true

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B

Which of the following is true

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Which of the following is true of Merton's model:

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Which of the following is true of Merton's model:

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Which of the following is true

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To be investment grade,a company has to have a credit rating of

Correct Answer
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In the Gaussian copula model which of the following is true

Correct Answer
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Which of the following is true?

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Which of the following is true

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Which of the following is usually used to define the recovery rate of a bond?

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Exam 24: Credit Risk

Which of the following is true

Correct AnswerverifiedShow Answer

A hazard rate is 1% per annum.What is the probability of a default during the first two years?

Correct AnswerverifiedC

Which of the following is true of Creditmetrics when it is used to calculate credit VaR

Correct AnswerverifiedShow Answer

If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years

Correct AnswerverifiedShow Answer

The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.The recovery rate is 60%.What is closest to the unconditional default probability for the sixth year?

Correct AnswerverifiedC

Which of the following is true

Correct AnswerverifiedShow Answer

Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

Correct AnswerverifiedShow Answer

Which of the following is true

Correct AnswerverifiedShow Answer

Which of the following is true

Correct AnswerverifiedShow Answer

Which of the following is true

Correct AnswerverifiedB

Which of the following is true

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Which of the following is true of Merton's model:

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Which of the following is true of Merton's model:

Correct AnswerverifiedShow Answer

Which of the following is true

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

To be investment grade,a company has to have a credit rating of

Correct AnswerverifiedShow Answer

In the Gaussian copula model which of the following is true

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

Which of the following is true

Correct AnswerverifiedShow Answer

Which of the following is usually used to define the recovery rate of a bond?

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C

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C

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B

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