FRM Part 2 Practice Questions

1. If the Area Under the Curve (AUC) from the Receiver Operating Characteristic (ROC) is 0.85, what is the calcul
2. According to the structural Merton model, the equity of a levered firm can be viewed as which type of derivati
3. A bank utilizes a 'through-the-cycle' (TTC) rating system. During a sharp economic downturn, what behavior sho
4. A Merton-style structural credit model treats a firm's equit… — In this framework, what does the strike price
5. What is the primary reason why risk-neutral probabilities of default (PD) extracted from credit spreads are ge
6. A bank's internal model for Credit Value Adjustment (CVA) us… — Why is this required by regulatory and account
7. Which resource is typically the second to be utilized after the defaulting member's own initial margin is exha
8. If the exposure is $100,000 and the LGD is 50%, what is the implied Probability of Default (PD)?
9. In the comparison of rating system philosophies, which system is characterized by stable ratings that rarely m
10. For a derivatives portfolio, which Counterparty Credit Risk (CCR) metric is primarily used for setting interna
11. According to the Merton structural model of credit risk, equity holders can be viewed as holding which of the
12. In a structural model, the 'default risk premium' is represented by the gap between:
13. Under IFRS 9 accounting, 'Stage 1' assets require a provision based on:
14. Which of the following describes 'physical settlement' in a CDS contract?
15. Which component of a credit default swap represents the expected present value of the contingent payment made
16. Which of the following is an example of RWR?
17. If the risky annuity (RPV01) is 4.2 and the par spread is 150 basis points, what is the value of the protectio
18. For a highly rated AAA corporate bond, the EL is typically very low because:
19. Structural models generally require which set of primary inputs to estimate a firm's default probability?
20. Which of the following best describes why CVA or capital charges still apply?
21. What does the term 'RPV01' (Risky PV01) represent in the context of credit default swap valuation?
22. Under the 'Black-Cox' extension of the Merton model, default can occur whenever asset value hits a barrier. Th
23. In a standard single-name credit default swap (CDS) contract, which of the following best describes the primar
24. A bank enters into a pay-fixed interest rate swap with a hedge fund. If the swap significantly reduces the dir
25. In a CDS valuation model, what does the 'Survival Probability' S(t) represent?
26. What is the most likely impact on the bank's reported fair value of its derivatives portfolio and its Common E
27. If a firm's leverage increases (Assets V stay same, Debt F increases), how does the Merton model predict the P
28. If an investor owns a bond and buys a CDS on that same bond from a highly rated bank, they have primarily elim
29. A risk analyst is pricing a new credit-sensitive derivative.… — What is the most likely reason for this?
30. A risk practitioner calculates the 'incremental CVA' of a ne… — Under what condition can this incremental CVA
31. What is the implied CCF?
32. Which of the following events is generally considered a 'credit event' that would trigger the protection leg o
33. Which parameter in the EL formula is most likely to be affected by the presence of high-quality physical colla
34. In a Central Counterparty (CCP) default waterfall, which component is typically the first line of defense used
35. In the Basel III regulatory framework, the Exposure at Default (EAD) for counterparty credit risk under the In
36. The Basel IRB capital formula (Vasicek model) assumes an 'as… — What is the primary implication of this assump
37. Which of the following describes the 'Debit Valuation Adjustment' (DVA) gain reported by banks during the 2008
38. How does an 'Overcollateralization (OC) Test' in a Collateralized Loan Obligation (CLO) protect senior notehol
39. When computing the Credit Valuation Adjustment (CVA) for a counterparty, which probability distribution should
40. In the context of the Merton model, why is the 'Distance to Default' (DD) usually mapped to an empirical distr

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