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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q69-Q74):
NEW QUESTION # 69
Under the CreditPortfolio View model of credit risk, the conditional probability of default will be:
- A. lower than the unconditional probability of default in an economic expansion
- B. lower than the unconditional probability of default in an economic contraction
- C. higher than the unconditional probability of default in an economic expansion
- D. the same as the unconditional probability of default in an economic expansion
Answer: A
Explanation:
When the economy is expanding, firms are less likely to default. Therefore the conditional probability of default, given an economic expansion, is likely to be lower than the unconditional probability of default.
Therefore Choice 'a' is the correct answer and the other statements are incorrect.
NEW QUESTION # 70
Ex-ante VaR estimates may differ from realized P&L due to:
I. the effect of intra day trading
II. timing differences in the accounting systems
III. incorrect estimation of VaR parameters
IV. security returns exhibiting mean reversion
- A. I and III
- B. I, II and III
- C. II, III and IV
- D. I, II and IV
Answer: B
Explanation:
Ex-ante VaR calculations can differ from actual realized P&L due to a large number of reasons. I, II and III represent some of them. Mean reversion however has nothing to do with VaR estimates differing from actual P&L. Therefore Choice 'c' is the correct answer.
NEW QUESTION # 71
A zero coupon corporate bond maturing in an year has a probability of default of 5% and yields12%. The recovery rate is zero. What is the risk free rate?
- A. 5.00%
- B. 6.40%
- C. 7.00%
- D. 5.26%
Answer: B
Explanation:
The probability of default would make the expected value of the future cash flows from both the corporate bond and the risk free bond identical. If p be the probability of default, the cash flows from the risky corporate bond would be
= (cash flows in the event of default x probability of default) + (cash flows without default x (1 - probability of default))
=> 5%*0 + (1 - 5%)*(1 + 12%) = (1 + Rf).
therefore Rf = 6.4%
(In reality investors would demand a 'credit risk premium' over and above the expected default loss rate. They are unlikely to be happy with just being compensated with exactly the expected default loss rate plus the risk- fre rate because the expected default loss rate itself is uncertain. They would demand some premium over and above what the default rate alone might mathematically imply above the risk free rate. In this question, this credit risk premium is ignored.)
NEW QUESTION # 72
If the systematic VaR for an equity portfolio is $100 and the specific VaR is $80, then which of the following is true in relation to the total VaR:
- A. Total VaR is less than $180
- B. Total VaR is $20
- C. Total VaR is greater than $180
- D. Total VaR is $180
Answer: A
Explanation:
Choice 'd' is correct because VaR is sub-additive in cases where correlation is less than one.
Specific VaR refers to the risk in the portfolio from security selection, ie the risk from holding the specific equities in the portfolio, while systematic risk refers to the market risk. Definitionally, specific risk and systematic risk are uncorrelated, ie their correlation is zero. Since their correlation is zero, combining them will produce a VaR number lower than their stand alone aggregate. Total risk includes both specific risk and systematic risk, and can be calculated taking into account the specific and systematic VaRs and their correlation.
All other answers are therefore incorrect.
NEW QUESTION # 73
If the full notional value of a debt portfolio is $100m, its expected value in a year is $85m, and the worst value of the portfolio in one year's time at 99% confidence level is $60m, then what is the credit VaR?
- A. $60m
- B. $15m
- C. $25m
- D. $40m
Answer: C
Explanation:
Credit VaR is the difference between the expected value of the portfolio and the value of the portfolio at the given confidence level. Therefore the credit VaR is $85m - $ 60m = $25m. Choice 'b' is the correct answer.
Note that economic capital and credit VaR are identical at a risk horizon of one year. Therefore if the question asks for economic capital, the answer would be the same.
[Again, an alternative way to look at this is to consider the explanation given in III.B.6.2.2: Credit Var = Q(L)
- EL where Q(L) is the total loss at a given confidence interval, and EL is the expected loss. In this case Q(L)
- $100-$60 = $40, and EL = $100-$85=$15. Therefore Credit VaR = $40-$15=$25.]
NEW QUESTION # 74
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