Free GARP FRM-Part-2 Exam Questions

Assume that a credit rating of A has a default probability of 0.07%, and a credit rating of AA has a default probability of 0.04%. If a bank is seeking a target rating of A, it will want to ensure that its economic capital will cover unexpected losses at a confidence level of:

Within the context of the three lines of defense model, risk champions (or risk specialists) are most likely to be included in which lines?

A manager from the structured credit risk desk at a bank is presenting to a group ofnewly hired risk analysts on calculating cash flows in a securitization structure. Themanager illustrates the procedure with the existing collateral pool of loans and thecorresponding liabilities, all with a maturity of 5 years, using the following information:Initial number of loans in the collateral pool 100Principal amount of each loan EUR 1,000,000Total coupon interest to be paid annually on all junior and senior bonds EUR 6,300,000Maximum annual amount flowing from the excess spread into the overcollateralization account EUR 1,500,000Swap rate per year for all maturities 3.5%Recovery rate in the event of a loan default 45%The manager makes additional observations as follows:• The loans in the collateral pool pay a fixed spread of 2.2% over the swap curve.• There were no defaults in year 1.• The value of the overcollateralization account at the end of year 1 was EUR 0.What is the value of the overcollateralization account at the end of year 2 if there are 8 defaults in year 2?

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?

Assuming a loan portfolio of L, a recovery rate of RR, and the percentage of losses on a portfolio less than V(T, X), which of the following formulas is used to estimate credit VaR?