Question 1

A bullet bond and an amortizing loan are issued at the same time with the same maturity and with the same principal. Which of these would have a greater credit exposure halfway through their life?

Options :

A : Indeterminate with the given information

B : They would have identical exposure half way through their lives

C : The amortizing loan

D : The bullet bond

Answer: D

Question 2

The risk that a counterparty fails to deliver its obligation upon settlement while having received the leg owedto it is called:

Options :

A : Pre-settlement risk

B : Credit risk

C : Replacement risk

D : Settlement risk

Answer: D

Question 3

Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process to determine a full loss distribution for operational risk?

Options :

A : A firm wide operational risk distribution is generated by adding together the frequency and severity distributions

B : A firm wide operational risk distribution is generated using Monte Carlo simulations

C : A firm wide operational risk distribution is set to be equal to the product of the frequency and severity distributions

D : The frequency distribution alone forms the basis for the loss distribution for operational risk

Answer: B

Question 4

Which of the following carry greater counterparty risk: a forward contract on a 10 year note, or a commercial paper carrying a AA credit rating with identicalmaturity and notional?

Options :

A : The forward contract has greater credit risk as its future gains are unknown

B : Credit risk can not be compared in these terms

C : They both carry the same credit risk

D : The commercial paper has greater credit risk as the entire notional is outstanding

Answer: D

Question 5

Which of the following is true for the actuarial approach to credit risk modeling (CreditRisk+):

Options :

A : Default correlations between obligors are accounted for using a multivariate normal model

B : The number ofdefaults is modeled using a binomial distribution where the number of defaults are considered discrete events

C : The approach considers only default risk, and ignores the risk to portfolio value from credit downgrades

D : The approach is based upon historical rating transition matrices

Answer: C

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