Learning Module 14 Credit Risk

Which two variables multiply together to form expected loss for a fixed-income exposure?

An unsecured corporate bond has POD = 2% and expected exposure of 1,000,000 with recovery rate 40%. What is the annual expected loss in currency terms?

Which of the following best describes why rating agencies may lag market pricing of credit risk?

Which credit spread change effect on a bond's full price is best estimated by using modified duration and convexity?

A bond has annual modified duration 6.0 and annual convexity 40. If the credit spread widens by 150 basis points (1.50%), what is the approximate percent price change (use decimal for spread change)?

Which of the following is the best definition of Loss Given Default (LGD)?

If a bond investor expects a 'flight to quality,' which of the following describes the typical market response?

Which borrower characteristic from the Cs of credit most directly addresses management willingness and behavior toward creditors?

An investor calculates EL for two bonds: Bond A EL = 0.9% and Bond B EL = 3.0%. Bond A spread is 0.9% and Bond B spread is 4.2%. Which statement is best supported?

Which item is least likely to be captured effectively by a credit rating?

Which ratio is most commonly used as a measure of coverage in corporate credit analysis?

A secured loan has first-lien collateral valued at 120 and the first-lien debt outstanding is 80. If the borrower defaults and collateral can be sold at 80% of book value, what is the recovery for the first-lien creditor?

Which of the following best explains why empirical duration may differ from analytical duration for corporate bonds with credit risk?

Which sector typically shows higher sensitivity of spreads over the economic cycle: investment-grade corporate bonds or high-yield bonds?

An analyst approximates an issuer's credit spread by POD*LGD. If POD = 4% and LGD = 40% (as percent of principal), what is the approximate credit spread in basis points implied by this calculation?

Which of the following corporate actions would most likely increase an issuer’s probability of default in the near term?

Which type of bond holder generally receives priority in recovery after asset sales in a corporate bankruptcy?

Which of the following is a top-down factor in sovereign credit analysis referenced in the module?

Which statement best describes the relationship between issuer ratings and issue ratings?

Which of the following is the best reason that secured debt usually has a lower yield than unsecured debt for the same issuer?

Which of these is an example of an internal credit enhancement used in ABS structures?

Which financial ratio would a credit analyst use to assess a corporation's leverage in an industry-standard way referenced in the module?

Which of the following scenarios would most likely reduce an issuer's recovery expectation on its subordinated bonds?

An analyst believes credit spreads will widen 100 basis points for a corporate bond with modified duration 5 and convexity 20 (annualized). What is the approximate percent price change including convexity?

Which recovery pattern is most likely for unsecured senior bonds compared to first-lien secured bonds during industry-wide defaults, based on historical averages discussed in the module?

Which of the following issuer types would most likely benefit from empirical duration measures rather than analytical duration?

Which of the following best describes 'credit migration risk'?

Which macroeconomic indicator, if it deteriorates sharply, is most likely to lead to wider credit spreads broadly across high-yield corporate bonds?

Which of the following is a typical feature of high-yield bond investors compared with investment-grade investors, as noted in the module?

Which factor most reduces a sovereign's default likelihood relative to similar-size peers, according to the chapter?

An analyst observes two bonds from the same issuer: one issued by the operating subsidiary and one by the parent holding company; there is no cross-guarantee. Which statement is most likely true about recovery in default?

Which indicator in sovereign credit analysis measures debt affordability directly?

Which best practice should an analyst follow when using credit ratings in investment decisions, based on module guidance?

Which factor most directly increases Loss Given Default for unsecured creditors?

Which scenario would most likely cause empirical duration for a corporate bond to be lower than its analytical duration?

Which of the following best describes the role of covenants in credit risk mitigation?

Which warning sign in a firm's disclosures was highlighted by the module as a red flag of potential accounting or governance issues?

If historical average recovery for subordinated bonds in an industry is 25% and projected POD for the bond is 8% for next year, what is the approximate expected loss as a percent of principal?

Which practice is most appropriate when comparing credit spreads among different issuers?

Which statement best summarizes the role of expected exposure (EE) in the EL calculation?

Which corporate financial ratio from the module is most useful to gauge short-term liquidity risk?

What is the main reason securitized ABS may offer a lower funding cost to an originator compared with the originator issuing unsecured corporate bonds?

Which credit feature explains why sovereign creditors cannot usually force a bankruptcy and liquidation for sovereign debtors unlike corporate debtors?

Which of the following best describes a major benefit of overcollateralization in ABS structures?

Which rating category corresponds to investment-grade status on S&P and Fitch scales, according to the module?

Which issuer action would most likely increase the loss given default for unsecured bondholders?

Which sovereign characteristic is most directly measured by FX reserves to GDP ratio, as shown in the module?

Which of the following recovery patterns would you expect for bonds defaulting in a strong economic environment versus a weak one, all else equal?

Which of the following best describes a situation where an investor would prefer empirical duration estimates over analytical duration estimates?

Which of the following best captures a reason to conduct scenario analysis or stress testing in credit portfolios, as emphasized by the module?