Frm Part 2 Practice Questions

1. According to the structural Merton model, the equity of a levered firm can be viewed as which type of derivati
2. What is the primary reason why risk-neutral probabilities of default (PD) extracted from credit spreads are ge
3. A bank utilizes a 'through-the-cycle' (TTC) rating system. During a sharp economic downturn, what behavior sho
4. If the Area Under the Curve (AUC) from the Receiver Operating Characteristic (ROC) is 0.85, what is the calcul
5. A Merton-style structural credit model treats a firm's equit… — In this framework, what does the strike price
6. For a derivatives portfolio, which Counterparty Credit Risk (CCR) metric is primarily used for setting interna
7. In the comparison of rating system philosophies, which system is characterized by stable ratings that rarely m
8. A bank's internal model for Credit Value Adjustment (CVA) us… — Why is this required by regulatory and account
9. Which resource is typically the second to be utilized after the defaulting member's own initial margin is exha
10. If the exposure is $100,000 and the LGD is 50%, what is the implied Probability of Default (PD)?
11. For a highly rated AAA corporate bond, the EL is typically very low because:
12. If a firm's leverage increases (Assets V stay same, Debt F increases), how does the Merton model predict the P
13. If an investor owns a bond and buys a CDS on that same bond from a highly rated bank, they have primarily elim
14. In a CDS valuation model, what does the 'Survival Probability' S(t) represent?
15. In a standard single-name credit default swap (CDS) contract, which of the following best describes the primar
16. In a structural model, the 'default risk premium' is represented by the gap between:
17. What is the implied CCF?
18. Structural models generally require which set of primary inputs to estimate a firm's default probability?
19. Under IFRS 9 accounting, 'Stage 1' assets require a provision based on:
20. Under the 'Black-Cox' extension of the Merton model, default can occur whenever asset value hits a barrier. Th
21. What does the term 'RPV01' (Risky PV01) represent in the context of credit default swap valuation?
22. Which component of a credit default swap represents the expected present value of the contingent payment made
23. Which of the following describes 'physical settlement' in a CDS contract?
24. Which of the following events is generally considered a 'credit event' that would trigger the protection leg o
25. Which parameter in the EL formula is most likely to be affected by the presence of high-quality physical colla
26. A bank enters into a pay-fixed interest rate swap with a hedge fund. If the swap significantly reduces the dir
27. Which of the following is an example of RWR?
28. According to the Merton structural model of credit risk, equity holders can be viewed as holding which of the
29. If the risky annuity (RPV01) is 4.2 and the par spread is 150 basis points, what is the value of the protectio
30. Which of the following best describes why CVA or capital charges still apply?
31. What is the most likely impact on the bank's reported fair value of its derivatives portfolio and its Common E
32. A risk analyst is pricing a new credit-sensitive derivative.… — What is the most likely reason for this?
33. A risk practitioner calculates the 'incremental CVA' of a ne… — Under what condition can this incremental CVA
34. How does an 'Overcollateralization (OC) Test' in a Collateralized Loan Obligation (CLO) protect senior notehol
35. In a Central Counterparty (CCP) default waterfall, which component is typically the first line of defense used
36. In securitization, why is 'excess spread' considered a 'flow' rather than a 'stock' of credit enhancement?
37. In the Basel III regulatory framework, the Exposure at Default (EAD) for counterparty credit risk under the In
38. In the context of the Merton model, why is the 'Distance to Default' (DD) usually mapped to an empirical distr
39. The Basel III CVA capital charge was primarily introduced to address:
40. The Basel IRB capital formula (Vasicek model) assumes an 'as… — What is the primary implication of this assump

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