10. Which of the following differences between key rate and forward bucket analysis is(are) true?
I. Estimating portfolio volatility with both methods is similar except the forward bucket technique requires fewer inputs and correlations.
II. The key rate shift approach assumes changes in rates in and around the chosen key rates.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
11. Sarah Johnson is a risk manager at the hedge fund International Management, Inc. She is analyzing the debt levels of several emerging countries and is relying on bond rating agencies to draw conclusions regarding the ability and willingness of the various countries to service debt. The risk management division of her firm has prepared its own analysis and there are several discrepancies between the agency ratings and the firm’s own ratings. A colleague of Johnson recommends that she ignore the agency ratings and rely solely on the firm ratings. Which of the following statements correctly describes a reason Johnson may not want to rely solely on rating agency opinions regarding debt repayment?
A. Ratings are not influenced by politics and governments or regimes.
B. Ratings are often delayed relative to the dynamic business and political environments.
C. When one rating agency upgrades or downgrades a country, the other agencies do not follow suit.
D. Rating agencies are not optimistic when it comes to rating sovereigns and corporations.
12. You are an associate at a rating agency reviewing a research report compiled by one of the new analysts. Which of the following statements in the report is correct?
A. For a given rating category, default rates show statistically significant variation based on geographic location.
B. For a given rating category, default rates show statistically significant variation based on industry.
C. The cumulative default rate is generally more dramatic for a bond rated Baa3 than for a bond rated Ba1.
D. The cumulative default rate is generally less dramatic for a bond rated BB than for a bond rated BBB.
13. Global Bank has made a loan with the following characteristics: total commitment of $5 million, of which $4.1 million is currently outstanding. Global has assessed an internal credit rating equivalent to a 1.5% default probability over the next year. Global has additionally estimated a 35% loss rate. What is the expected loss for the loan?
A. $21,525.
B. $24,596.
C. $26,250.
D. $27,735.
14. Loss frequency and loss severity are combined in an effort to simulate an expected loss distribution. Loss frequency is most often modeled with which of the following distributions?
A. Bernoulli distribution.
B. Binomial distribution.
C. Lognormal distribution.
D. Poisson distribution.
15. As an associate risk manager at a bank, you are concerned about the various risks faced by the bank’s securitization transactions. Which of the following risks refers to a bank having to hold onto assets for longer than planned and incurring financing costs as a result?
A. Contingent risk.
B. Funding liquidity risk.
C. Pipeline risk.
D. Wrong-way risk.
