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1. Which of the following formulae describes CVA (Credit Valuation Adjustment)? All acronyms have their usual meanings (LGD=Loss Given Default, ENE=Expected Negative Exposure, EE=Expected Exposure, PD=Probability of Default, EPE=Expected Positive Exposure, PFE=Potential Future Exposure)
A) LGD * ENE * PD
B) LGD * PFE * PD
C) LGD * EE * PD
D) LGD * EPE * PD
2. There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds over a one year horizon are 0.03 and 0.08 respectively. If the default correlation is zero, what is the one year expected loss on this portfolio?
A) $1.38m
B) $5.26m
C) $11m
D) $5.5m
3. Company A issues bonds with a face value of $100m, sold at $98. Bank B holds $10m in face of these bonds acquired at a price of $70. Company A then defaults, and the recovery rate is expected to be 30%. What is Bank B's loss?
A) $7m
B) $4.9m
C) $2.1m
D) $4m
4. Which of the following statements are true:
I. A high score according to Altman's Z-Score methodology indicates a lower default risk II. A high score according to the Probit or Logit models indicates a higher default risk III. A high score according to Altman's Z-Score methodology indicates a higher default risk IV. A high score according to the Probit or Logit models indicates a lower default risk
A) II and III
B) I and II
C) III and IV
D) I and IV
5. For a back office function processing 15,000 transactions a day with an error rate of 10 basis points, what is the annual expected loss frequency (assume 250 days in a year)
A) 3750
B) 37500
C) 375
D) 0.06
Solutions:
| Question # 1 Answer: D | Question # 2 Answer: D | Question # 3 Answer: D | Question # 4 Answer: B | Question # 5 Answer: A |
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