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P2.T6.700. Credit risk classifications (De Laurentis)

Nicole Seaman

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Learning objectives: Describe the role of ratings in credit risk management. Describe classifications of credit risk and their correlation with other financial risks. Define default risk, recovery risk, exposure risk and calculate exposure at default.


700.1. In contrasting approaches to credit risk, De Laurentis distinguishes between default-mode and value-based valuation. A default-mode valuation (aka, loss-based valuation) is LEAST likely to formally incorporate which of the following risks?

a. Default risk
b. Spread risk
c. Exposure risk
d. Recovery risk

700.2. Stimway Corp has a revolving credit line with its bank. It has already drawn $1.0 million against a limit of $3.0 million. If we assume a loan equivalency factor (LEQ) of 0.70 or 70.0%, what is the exposure at default (EAD)?

a. $1.40 million
b. $2.10 million
c. $2.40 million
d. $3.70 million

700.3. While performing a default-model valuation for a bond offering, analyst Samantha encounters a disposition of assets clause that limits the borrower's ability to sell key assets. Which measure is most likely impacted by this clause?

a. Default
b. Exposure
c. Recovery
d. None of the above (it has no direct bearing)

Answers here:
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