Free GARP FRM-Part-2 Exam Questions

Become GARP Certified with updated FRM-Part-2 exam questions and correct answers

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Total 503 Questions | Updated On: Jan 13, 2026

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Question 1

The head of the fixed-income department of a bank asks a risk analyst to review anoutstanding bond issued by Company GRN, a livestock producer. The bondcurrently trades at a spread of 250 bps over the risk-free interest rate and has arecovery rate of 75%. Senior management of the bank has expressed concernabout the slowdown in business activities in the livestock industry, which isexpected to last for the next 3 years. The analyst applies the constant hazard rateprocess in estimating default probability and assumes that, under a stressed marketscenario, the bond would trade at a spread of 480 bps over the risk-free interest ratecurve, and its recovery rate would decrease to 40%. Assuming the stress scenarioprevails, what would be the correct estimate of the probability that Company GRNwould not default on its bond over the next 3 years?

A : D 74.1%

B : A 69.8%

C : C 86.6%

D : B 78.7%

Answer: D

Question 2

Which of the following statements regarding risk management programs with service providers to manage outsourcing risk is correct?

A : The program should contain more detail if there are only a few outsourced activities to established service providers.

B : The program should focus on business continuity and contingency plans.

C : The program should contain adequate oversight and controls over all activities that impact the financial institution.

D : The program should require risk assessments to be updated as a result of updated risk mitigation techniques on a sufficiently regular basis.

Answer: B

Question 3

Which of the following statements best describes a Gaussian copula?

A : A major disadvantage of a Gaussian copula model is the transformation of the original marginal distributions in order to define the correlation matrix.

B : The mapping of each variable to the new distribution is done by defining a mathematical relationship between marginal and unknown distributions.

C : A Gaussian copula maps the marginal distribution of each variable to the standard normal distribution.

D : A Gaussian copula is seldom used in financial models because ordinal numbers are required.

Answer: C

Question 4

The Merton model is different from Moody’s-KMV Expected Default Frequency approach in two key areas. Which of the following statements refers to one of those differences?

A : The Merton model factors the market value of the borrower’s equity, while Moody’s-KMV model uses book value.

B : The Merton model uses the risk-free rate to calculate the distance to default, while Moody’s-KMV model uses a customized value.

C : Moody’s-KMV model uses a default point with short-term debt and half of long term debt, while the Merton model only uses short-term debt.

D : The Merton model uses historical data to derive a distribution of default frequencies, while Moody’s-KMV model uses standardized expectations.

Answer: C

Question 5

A risk analyst is reviewing his bank’s credit risk management policies. He notes that banks have limits on related-party financing decisions. His colleague agrees and correctly adds that:

A : the term single client only refers to a legal person.

B : acceptances and letters of credit should be factored into the risk exposure of a single client.

C : all banks have a limit of 10% of capital for a single client.

D : loan collateral should be included in exposure sizing using mark-to-market principles.

Answer: B

Page: 1 / 101

Total 503 Questions | Updated On: Jan 13, 2026

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