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31. Suppose the rate on 1-year zero-coupon corporate bonds is 13.5% and the implied probability of default is 3.96%. Assume LGD is 100%. Based on the given information, the 1-year T-bill rate is closest to:
ffice:smarttags" />A. 4.49%
B. 9.00%
C. 6.74%
D. 6.00%
Correct answer is B
A is incorrect. See the correct calculation in B below.ffice ffice" />
B is correct.
Probability of Default = 1 ? [(1 + 1-yr T-bill rate) / (1 + 1-yr corp. bond rate)]
= 1 ? [(1 + 1-yr T-bill rate) / (1 + 0.135)]
Solving the above, 1-year T-bill rate = 9.005%.
C is incorrect. See the correct calculation in B above.
D is incorrect. See the correct calculation in B above.
Reference: Saunders and Cornett, Chapter 11, Credit Risk: Individual Loan Risk.
32. Which of the following statements about credit risk models is most accurate?
A. KMV models offer a structural approach to measuring credit risk that is based on credit migration.
B. CreditRisk+ models offer an actuarial approach to measuring credit risk that treats the bankruptcy and recovery processes as endogenous.
C. KMV models are an extension of Merton's Option Pricing Model employing equity price volatility as a proxy for asset price volatility.
D. CreditRisk+ models, like the reduced-form models, use a chi-square distribution to describe default.
Correct answer is C
A Is incorrect. KMV models are NOT based on credit migration.
B Is incorrect. In CreditRisk+ models, the bankruptcy/recovery processes are exogenous.
C Is correct. KMV models employ equity price volatility as a proxy for asset price volatility.
D Is incorrect. CreditRisk+ models use a Poisson or Poisson-like distribution to describe default.
Reference: Amaud de Servigny and Olivier Renault, Chapter 6, Credit Risk Portfolio Models.
33. Firm A has equity volatility of .3 and debt to firm value (debt to capitalization) of .4. Firm B has the same debt to firm value but its asset volatility is .3. Which statement about firms A and B is true?
A. The capital of Firm A is less than the leverage of Firm B.
B. The volatility of Firm A's operations is greater than the volatility of Firm B's operations.
C. The equity of Firm B is less risky than the equity of Firm A.
D. The equity of Firm A is less risky than the equity of Firm B.
Correct answer is D
A is incorrect because the two firms have the same capital ratio, so they have the same capital if they have the same assets. As no mention was made of asset size, it could go either way.
B is incorrect Firm A actually has the lower asset volatility and the opposite of the sentence is true.
C is incorrect. We know that asset volatility is smaller than equity volatility holding constant leverage, so A has the lower asset volatility. This answer implies its asset volatility is higher.
D is correct. See c for the explanation.
Reference: Stulz, Risk Management and Derivatives, Chapter 18
34. Which of the following is not a modeling approach to credit scoring?
A. k-nearest neighbor classifier models.
B. Logit and Probit models.
C. Fisher linear discriminant analysis.
D. Bayesian vector autoregression.
Correct answer is D
Explanation: BVAR is a time series tool used to analyze market shocks. It has limited cross-sectional applicability and is not a commonly used credit scoring modeling approach.
Reference de Servigny and Renault, Chapter 3
35. Which of the following is not a distinction between cash and synthetic CDOs?
The assets are actually sold to the SPV in a cash CDO but are not in a synthetic CDO.
B. The cash CDO provides exposure to actual assets, whereas a synthetic CDO provides a similar economic exposure through credit derivatives
C. Cash raised from the issuance of securities is used to finance the purchase of the assets in a cash CDO and to collateralize the CDS in a synthetic CDO.
D. Cash CDOs can have at most one layer of subordination, whereas synthetic CDOs can issue many subordinated tranches of securities.
Correct answer is D
Explanation: Both cash and synthetic CDOs can have any number of layers of subordination
Reference: Meissner, Chapter 3 | 
发表于 2009-6-13 14:17
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