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  1. Fran

    P2.T6.307. Hazard rate (Malz section 7.2)

    AIMs: Explain how default risk for a single company can be modeled as a Bernoulli trial. Explain the relationship between exponential and Poisson distributions. Define the hazard rate and use it to define probability functions for default time and conditional default probabilities. Questions...
  2. Fran

    P1.T4.316. Tuckman's yield to maturity (YTM)

    AIMs: Define, interpret, and apply a bond’s yield-to-maturity (YTM) to bond pricing. Compute a bond's YTM given a bond structure and price. Explain the relationship between spot rates and YTM. Calculate the price of an annuity and a perpetuity. Questions: 316.1. Assume the following 2-year...
  3. Fran

    P2.T6.306. Credit spreads and spread '01 (DVCS; Malz section 7.1)

    AIMs: Define the different ways of representing spreads. Compare and differentiate between the different spread conventions and compute one spread given others when possible. Define and compute the Spread ‘01. Questions: 306.1. The following curves are applicable to a risky 2-year bond that...
  4. Fran

    P1.T4.315. Tuckman's bond spreads

    AIMs: Distinguish between gross and net realized returns, and calculate the realized return for a bond over a holding period including reinvestments. Define and interpret the spread of a bond, and explain how a spread is derived from a bond price and a term structure of rates. Questions...
  5. Fran

    P2.T7.307. Operational risk distributions

    Questions: 307.1. Analyst Sally develops the following model for her bank's daily operational risk losses, which includes the assumption that the daily frequency is a Bernoulli with probability of only 6.0% (several minor losses are expected but model ignores losses below $3,000) and, further...
  6. Fran

    P1.T4.314. Forward rate curve trades

    Questions AIMs: Interpret the relationship between spot, forward and par rates. Assess the impact of maturity on the price of a bond and the returns generated by bonds. Define the “flattening” and “steepening” of rate curves and construct a hypothetical trade to reflect expectations that a...
  7. Fran

    P2.T7.306 Operational risk (Basel)

    Questions 306.1. Acme Bank is a small bank with three business lines (corporate finance, commercial banking, and asset management). The bank has experienced rapid growth in the last three years, as its annual gross income grew from -$7.0 million (three years ago) to $71.0 last year: Roger...
  8. Fran

    P1.T4.313. Forward and par rates

    AIMs: Define and interpret the forward rate, and compute forward rates given spot rates. Define par rate and describe the equation for the par rate of a bond. Interpret the relationship between spot, forward and par rates. Questions: 313.1. For the 1.5 year swap rate curve, assume the...
  9. Fran

    P2.T7.305. Operational risk tools (ERM)

    Questions: 305.1. Each of the following is accurate about a Risk Appetite Framework (RAF), according to the Senior Supervisors Group, EXCEPT which is not accurate? a. An RAF establishes an explicit, forward-looking view of a firm’s desired risk profile in a variety of scenarios and sets out...
  10. Fran

    P1.T4.312. Discount factors and spot rates extracted from swap rates

    AIMs: Calculate and describe the impact of different compounding frequencies on a bond’s value. Calculate discount factors given interest rate swap rates. Compute spot rates given discount factors. Questions: 312.1. Assume we observe the following (unrealistically) steep swap rate curve...
  11. Fran

    P2.T7.304. Model Risk

    Questions: 304.1. Each of the following statements about a firm's value at risk (VaR) model is true EXCEPT which is false? a. In comparison to an operational VaR model, a market risk VaR model is both more likely to be driven by internal historical data and to utilize backtesting as a the...
  12. Fran

    P1.T4.311. Accrued interest

    AIMs: Differentiate between “clean” and “dirty” bond pricing and explain the implications of accrued interest with respect to bond pricing. Describe the common day-count conventions used in bond pricing. Questions: 311.1. An investor purchases $10,000 face amount of the U.S. Treasury 2 7/8...
  13. Fran

    P2.T7.303. Liquidity and Leverage (Malz)

    Questions: 303.1. Your colleague Peter blames the fragility of commercial banks primarily on the fractional-reserve banking system. He argues that fractional-reserve banking exposes a bank to the threat of a general loss of confidence in its ability to pay out depositors. In an extreme...
  14. Fran

    P2.T7.302. Liquidity risk: liquidity-adjusted value at risk (VaR) models

    Questions 302.1. Malz gives us the following adjustment which estimates a liquidity-adjusted VaR based on the number of trading days (T) required to liquidate a position: Portfolio Manager Sally holds an equity portfolio with a value of $10.0 million and volatility of 18.0% per annum. She...
  15. Fran

    P1.T4.309. Discount factors and law of one price

    AIMs: Define discount factor and use a discount function to compute present and future values. Define the “law of one price,” explain it using an arbitrage argument, and describe how it can be applied to bond pricing. Questions: 309.1. The table below gives coupon rates and mid-market...
  16. Fran

    P2.T7.301. Liquidity risk: definitions (Malz and Dowd)

    Questions: 301.1. In the FRM, various authors approach the classification of liquidity risk with different terminologies. However, the general liquidity risk framework is similar across each of Jorion, Dowd and Malz. Each of the following is true about the liquidity risk typology, across these...
  17. Fran

    P1.T2.308. Coskewness and cokurtosis

    AIMs: Interpret the skewness and kurtosis of a statistical distribution, and interpret the concepts of coskewness and cokurtosis. Define and interpret the best linear unbiased estimator (BLUE). Questions: 308.1. The thee joint outcomes of two variables (X,Y) are characterized by the...
  18. Fran

    P2.T7.300. Economic capital

    Questions: 300.1 To calculate its risk-adjusted return on capital (RAROC), your bank uses a capital charge of 4.00% for long-term credit commitments with a loan equivalent factor (LEF) of 0.50 assigned to the undrawn portion. Stress testing suggests the LEF may be too low during economic...
  19. Fran

    P1.T2.307. Skew and Kurtosis (Miller)

    AIMs: Describe the four central moments of a statistical variable or distribution: mean, variance, skewness and kurtosis. Questions: 307.1. A bond has a default probability of 5.0%. Which is nearest, respectively, to the skew (S) and kurtosis (K) of the distribution? a. S = 0.0, K = 2.8...
  20. Fran

    P2.T6.305. Credit Value at Risk (CVaR)

    AIM: Define Credit VaR (Value-at-Risk) Questions: 305.1. A firm has current asset value of $1.0 billion with asset volatility of 25.0%. Its sole debt issue is a zero-coupon bond with face value of $800 million due in one year. The risk free rate is only 3.0% but the firm's expected return...
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