[ 2009 FRM ] Long Practice Exam 1 Q31-35

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:

A. 4.49%

B. 9.00%

C. 6.74%

D. 6.00%

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.

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.

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.

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.