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# Exam FeedbackMay 2019 Part 2 Exam Feedback

#### etherm

##### New Member
We really have no idea. However, I hope a mid to high 50s should suffice. I've narrowed down the range of my results to between 40-55/80 based on what's been discussed here, though I can probably narrow it down there further to 44-52/80. Will it be enough? Let's see. Fingers crossed!
40-48 seems achievable but beyond 50 will be a challenge.

#### kylian.mbappe

##### Member
A risk analyst estimates that the hazard rate for a company is 0.12 per year. Assuming a constant hazard rate
model, what is the probability that the company will survive in the first year and then default before the end
of the second year?
A. 8.9%
B. 10.0%
C. 11.3%
D. 21.3%
Explanation: B is correct.
The joint probability of survival up to time t and default over (t, t+ τ) is:
P[t* > t ∩ t* < t+τ] = 1-e-λ(t+ τ)-(1-e-λt) = e-λt
(1-e-λτ
)
The joint probability of survival the first year and default over the first year and the
second year is:
P[t* > 1 ∩ t* < 1+1] = e-0.12*1(1-e-0.12*1) = 10.03%
This is mock exam.
Real exam was :
Assuming a constant hazard rate
model, what is the probability that the company will default in the second year given it has survived in the first year ?

This is not the same...

#### Anoop Kumar

##### New Member

A risk analyst estimates that the hazard rate for a company is 0.12 per year. Assuming a constant hazard rate
model, what is the probability that the company will survive in the first year and then default before the end
of the second year?
A. 8.9%
B. 10.0%
C. 11.3%
D. 21.3%
Explanation: B is correct.
The joint probability of survival up to time t and default over (t, t+ τ) is:
P[t* > t ∩ t* < t+τ] = 1-e-λ(t+ τ)-(1-e-λt) = e-λt
(1-e-λτ
)
The joint probability of survival the first year and default over the first year and the
second year is:
P[t* > 1 ∩ t* < 1+1] = e-0.12*1(1-e-0.12*1) = 10.03%

#### kylian.mbappe

##### Member
In the mock exam, you are asked for the joint probability (survival in 1st year AND THEN default in 2nd year => two events).
In the real exam, you were asked for the conditional probability (default in 2nd year GIVEN survival in 1st year => one event).

In the mock exam, the perspective was from t=0, and in the real exam it was from t=1 because in the real exam, they assumed the firm had not defaulted in year 1, and asked about year 2. And in the mock exam they are just asking about a scenario in years 1 and 2 combined. No information about what happened in first year was given.

Thus, the formula was : Marginal PD in Year 2 / (1 - Marginal PD in Year 1)
i.e (Cumulative PD after 2 years - Cumulative PD after 1 year) / (1 - Cumulative PD after 1 year)

= { 1-exp[-0.12*2] - (1-exp[-0.12] ) } / {exp[-0.12] }

= { exp[-0.12] - exp[-0.12*2] } / {exp[-0.12] }

= 0.11307956328

#### luciedo

##### New Member
Not exactly.

As I said above, there may be several exam versions ... But I am 100% sure that the question was about PofD 2y given SURVIVAL 1y..
So it is not the same question as it was in the mock exam.
Agree

#### kylian.mbappe

##### Member
In the mock exam, you are asked for the joint probability (survival in 1st year AND THEN default in 2nd year => two events).
In the real exam, you were asked for the conditional probability (default in 2nd year GIVEN survival in 1st year => one event).

In the mock exam, the perspective was from t=0, and in the real exam it was from t=1 because in the real exam, they assumed the firm had not defaulted in year 1, and asked about year 2. And in the mock exam they are just asking about a scenario in years 1 and 2 combined. No information about what happened in first year was given.

Thus, the formula was : Marginal PD in Year 2 / (1 - Marginal PD in Year 1)
i.e (Cumulative PD after 2 years - Cumulative PD after 1 year) / (1 - Cumulative PD after 1 year)

= { 1-exp[-0.12*2] - (1-exp[-0.12] ) } / {exp[-0.12] }

= { exp[-0.12] - exp[-0.12*2] } / {exp[-0.12] }

= 0.11307956328

And it doen not matter if it was year 2 given year 1 OR year 3 given year 2 OR year 4 given year 3 because the hazard rate is constant :

(exp[-0.12] - exp[-0.24]) /exp[-0.12] =
(exp[-0.24] - exp[-0.36]) /exp[-0.24] =
(exp[-0.36] - exp[-0.48]) /exp[-0.36] =
(exp[-0.48] - exp[-0.60]) /exp[-0.48] =...=
0.11307956328

#### etherm

##### New Member
Ok guys ... Congrats for getting it right if that is the case

#### Anoop Kumar

##### New Member
There was a question where 1 option said Age weighted simulation with decay rate =0 and will become historical simulation, is this option wrong does any one remember, i know this is wrong option
+ 1 question regarding Tier 1 capital impact after declaring dividends. this was tricky as the Existing tier 1 is not going to get impacted after dividend declaration. It will definitely impact the future Tier. please suggest if i am wrong

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#### antonyalexin

##### New Member
And it doen not matter if it was year 2 given year 1 OR year 3 given year 2 OR year 4 given year 3 because the hazard rate is constant :

(exp[-0.12] - exp[-0.24]) /exp[-0.12] =
(exp[-0.24] - exp[-0.36]) /exp[-0.24] =
(exp[-0.36] - exp[-0.48]) /exp[-0.36] =
(exp[-0.48] - exp[-0.60]) /exp[-0.48] =...=
0.11307956328
But I could remember something like this in the question that 'there are no defaults in the first year". In that case, can we assume that there is 100% survivability in the first year? hence despite conditional probability, the result could still be 10.0%

#### nikic

##### Active Member
There was a question where 1 option said Age weighted simulation with decay rate =0 and will become historical simulation, is this option wrong does any one remember, i know this is wrong option
+ 1 question regarding Tier 1 capital impact after declaring dividends. this was tricky as the Existing tier 1 is not going to get impacted after dividend declaration. It will definitely impact the future Tier. please suggest if i am wrong
1) For this, I picked Filtered Historical Simulation as the answer.

2) Why would existing Tier 1 capital not be impacted by declaration of dividends? Whenever dividends are declared, Tier 1 capital is reduced. The other options were wrong.

#### Anoop Kumar

##### New Member
1) For this, I picked Filtered Historical Simulation as the answer.

2) Why would existing Tier 1 capital not be impacted by declaration of dividends? Whenever dividends are declared, Tier 1 capital is reduced. The other options were wrong.
The Tier 1 capital is made up of Common equity and Retained earnings. and lets say a firms Retained earning+Common equity is 100 at the End of Q3 2018 and the firm added after tax earnings by 12, 13 respectively in Oct-2018, No-2018 and if we are at end of Nov 2018 the Tier 1 capital would have been 125 (100+12+13) as no dividends are to be paid out as of now, and at the end of Q4-2018, firm announces 2% dividend on 140 (including 15 after tax earnings added from Dec-2018). the existing tier 1 (125) is still intact but after tax earning (15) of Dec-18 will still not be called as retained earnings as it has not moved to balance sheet yet but once the dividend declaration of 2% happens 2.8 will be deducted from 15 (which is still not retained earning) after the deduction, 12.2 will be moved to balance sheet and will now be called as retained earning. So Tier 1 capital will now be 137.2. Existing Tier 1 wasn't impacted when dividend was declared.

Somehow i felt that there was 1 option which seemed correct apart from the above. I may be wrong as i was under pressure

#### nikic

##### Active Member
The Tier 1 capital is made up of Common equity and Retained earnings. and lets say a firms Retained earning+Common equity is 100 at the End of Q3 2018 and the firm added after tax earnings by 12, 13 respectively in Oct-2018, No-2018 and if we are at end of Nov 2018 the Tier 1 capital would have been 125 (100+12+13) as no dividends are to be paid out as of now, and at the end of Q4-2018, firm announces 2% dividend on 140 (including 15 after tax earnings added from Dec-2018). the existing tier 1 (125) is still intact but after tax earning (15) of Dec-18 will still not be called as retained earnings as it has not moved to balance sheet yet but once the dividend declaration of 2% happens 2.8 will be deducted from 15 (which is still not retained earning) after the deduction, 12.2 will be moved to balance sheet and will now be called as retained earning. So Tier 1 capital will now be 137.2. Existing Tier 1 wasn't impacted when dividend was declared.

Somehow i felt that there was 1 option which seemed correct apart from the above. I may be wrong as i was under pressure
That’s not my understanding of how dividend declaration works. I absolutely do not think there’s a “net off” factor here. You could say so theoretically, but in practice it should all go to Retained Earnings, out of which dividends are declared.

Banks for example only declare dividends after quarterly such as Q4 results are announced. There may be an entry on the balance sheet for money set aside to pay for the dividends, but all that comes out of Retained Earnings.

What answer did you pick? There was one about retiring callable bond or something. They just seemed wrong.

#### Anoop Kumar

##### New Member
That’s not my understanding of how dividend declaration works. I absolutely do not think there’s a “net off” factor here. You could say so theoretically, but in practice it should all go to Retained Earnings, out of which dividends are declared.

Banks for example only declare dividends after quarterly such as Q4 results are announced. There may be an entry on the balance sheet for money set aside to pay for the dividends, but all that comes out of Retained Earnings.

What answer did you pick? There was one about retiring callable bond or something. They just seemed wrong.

I dont remember the option which i have chose . for your reference as per www.investopedia.com
RE=Beginning Period RE+Net Income (or Loss)−Cash Dividends−Stock Dividends

#### nikic

##### Active Member
I dont remember the option which i have chose . for your reference as per www.investopedia.com
RE=Beginning Period RE+Net Income (or Loss)−Cash Dividends−Stock Dividends

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#### MiguelVitiello

##### New Member
Subscriber
I also have doubts about the BCVA, but because I know the formula with 'Positive' and 'Negative' expected exposure and I get very confused identifying who is who.

Mv

#### AHoekstra

##### New Member
Subscriber
The Tier 1 capital is made up of Common equity and Retained earnings. and lets say a firms Retained earning+Common equity is 100 at the End of Q3 2018 and the firm added after tax earnings by 12, 13 respectively in Oct-2018, No-2018 and if we are at end of Nov 2018 the Tier 1 capital would have been 125 (100+12+13) as no dividends are to be paid out as of now, and at the end of Q4-2018, firm announces 2% dividend on 140 (including 15 after tax earnings added from Dec-2018). the existing tier 1 (125) is still intact but after tax earning (15) of Dec-18 will still not be called as retained earnings as it has not moved to balance sheet yet but once the dividend declaration of 2% happens 2.8 will be deducted from 15 (which is still not retained earning) after the deduction, 12.2 will be moved to balance sheet and will now be called as retained earning. So Tier 1 capital will now be 137.2. Existing Tier 1 wasn't impacted when dividend was declared.

Somehow i felt that there was 1 option which seemed correct apart from the above. I may be wrong as i was under pressure

If I understand you correctly then I think that you are making the interaction between a Profit and Loss Statement and a Balance Sheet more static here then you should, in my opinion. Your earnings are not moved to the balance sheet at your discretion, this is a continuous process. I think the easiest way to see this is by taking an accounting perspective and making the respective debit/credit entries. If you make an expense (possibly dividends?), you credit cash (assets decrease) and debit your P&L (Dividends paid?). The bottomline/NI of your P&L decreases due to the expense and is added in your equity in order to balance your balance sheet (liabilities decrease). I think its often called something like 'net income current fiscal year' or such. I believe that this account is part of your stockholder equity.

#### mimiyao

##### New Member
I also have doubts about the BCVA, but because I know the formula with 'Positive' and 'Negative' expected exposure and I get very confused identifying who is who.

Mv
I also got confused to apply the exposures to counterparty and party .. but I remember I use the first exposure amount given in the question to multiple on the party side , the second exposure on the counterparty side.. don't remember the final answer. anyone remember the choices ? Thank you.

#### MiguelVitiello

##### New Member
Subscriber
I also got confused to apply the exposures to counterparty and party .. but I remember I use the first exposure amount given in the question to multiple on the party side , the second exposure on the counterparty side.. don't remember the final answer. anyone remember the choices ? Thank you.

I remember a) 60000, b) 1000000; and no more, I remember selecting 60000, and put in the formula 10 in the first part, and -5 in the second part. But of course not sure on that.

Mv

#### mimiyao

##### New Member
(1) On selecting the manager with the best performance, options were alpha, mogdiliani, information ratio. etc
I choose " Mogdiliani " . Anyone ? many of my friends choose " IR "
(2) Answer = "declaring cash dividend will reduce Tier 1 capital" ( what about the other choices for this question? cannot remember clearly what the questions is..)
(3) New CDO, assesses data quality, which is the biggest issue? -> Answer = different business units have different formats of risk data (option D)
I think I select something like " build a centralized data warehouse to store data ?" anyone with the same answer ?
(4) Regresssion hedge - obtain beta value from the table -> Answer : I pick " 711" but I think I'm wrong. the correct answer should be 677 ?
(5) Collateral – threshold, remargin period etc -> Answer = high threshold ( what's the question about ? anyone remember whats the other answers for this question? )

Thank you.