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 04, 2026

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Question 1

If the unconditional default probability of a Ba-rated bond during Year 3 is 1.914% and the probability of survival through Year 2 is 97.413%, the probability of a default during Year 3, conditional on no earlier default, is closest to:

A : 0.673%.

B : 1.914%.

C : 2.587%.

D : 1.965%.

Answer: D

Question 2

Brett Doninger recently placed an order to sell a stock when the market price was $42.12. The market was volatile and, by the time Doninger’s broker sold the stock, the price had fallen to $41.88. In the market, this phenomenon is known as:

A : the spread risk factor.

B : transactional imbalance.

C : adverse selection.

D : slippage.

Answer: D

Question 3

In the context of arbitrage trades, if the CDS spread is significantly greater than the bond yield spread, what is the most appropriate action by the investor?

A : Buy the corporate bond and buy CDS protection.

B : Sell the corporate bond and sell CDS protection.

C : Buy the corporate bond and sell CDS protection.

D : Sell the corporate bond and buy CDS protection.

Answer: B

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

At inception, the tranches in a synthetic CDO are priced to earn a spread that is:

A : higher for senior tranches, as they represent a larger notional principal.

B : aggregate in amount to the premium paid to binary CDSs.

C : consistent with their seniority.

D : equal for each tranche.

Answer: C

Page: 1 / 101

Total 503 Questions | Updated On: Jan 04, 2026

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