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1. Suppose that the cumulative probability of a company defaulting by years one, two, three and
four are 3%, 6.5%, 10%, and 14.5%, respectively. What is the probability of default in the fourth
year conditional on no earlier default?
A. 4.5%
B. 5.0%
C. 5.5%
D. 6.0%
2. Which of the following is usually used to define the recovery rate of a bond?
A. The value of the bond immediately after default as a percent of its face value
B. The value of the bond immediately after default as a percent of the sum of the bond’s
face value and accrued interest
C. The amount finally realized by a bondholder as a percent of face value
D. The amount finally realized by a bondholder as a percent of the sum of the bond’s face
value and accrued interest
4. A hazard rate is 1% per annum. What is the probability of a default during the first two years?
A. 2.00%
B. 2.02%
C. 1.98%
D. 1.96%
7. If a company’s five year credit spread is 200 basis points and the recovery rate in the event of a
default is estimated to be 20% what is the average hazard rate per year over the five years
A. 0.4%
B. 1.2%
C. 1.8%
D. 2.5%
17. A derivatives dealer has a single transaction with a company which is a long position in a five-
year option. The Black-Scholes-Merton value of the option is $6. Suppose that the credit spread
on five-year bonds issued by the company is 100 basis points. What is the dealer’s CVA per
option purchased from the counterparty?
A. $0.19
B. $1.19
C. $0.29
D. $1.29
20. Which of the following is true of Creditmetrics when it is used to calculate credit VaR
A. Creditmetrics takes defaults but not downgrades into account
B. Creditmetrics takes downgrades but not defaults into account
C. Creditmetrics considers neither defaults nor downgrades
D. Creditmetrics considers both defaults and downgrades