GARP GARP Certifications ICBRR Questions & Answers

• Question 251:

  Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio?

  A. Credit VaR

  B. Probability of default

  C. Loss given default

  D. Modified duration

  Correct Answer: A

• Question 252:

  Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?

  A. Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease.

  B. Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.

  C. Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease.

  D. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.

  Correct Answer: D

• Question 253:

  In the United States, Which one of the following four options represents the largest component of securitized debt?

  A. Education loans

  B. Credit card loans

  C. Real estate loans

  D. Lines of credit

  Correct Answer: C

• Question 254:

  A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.

  A. The marginal cost of funds provided.

  B. The overhead cost of maintaining the loan and the account.

  C. The inherent risk of lending to this borrower while providing a return on the risk capital used to the support the loan.

  D. The opportunity cost of risk-adjusted marginal cost of capital.

  Correct Answer: D

• Question 255:

  A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?

  A. The options positions hedge the forward position by 25%.

  B. The option positions hedge the forward position by 50%.

  C. The option positions hedge the forward position by 75%.

  D. The option positions hedge the forward position by 100%.

  Correct Answer: B

• Question 256:

  Which one of the following four parameters is NOT a required input in the Black-Scholes model to price a foreign exchange option?

  A. Underlying exchange rates

  B. Underlying interest rates

  C. Discrete future stock prices

  D. Option exercise price

  Correct Answer: C

• Question 257:

  Which one of the following four statements correctly describes an American call option?

  A. An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date.

  B. An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date.

  C. An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date.

  D. An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date.

  Correct Answer: C

• Question 258:

  Which of the following factors would typically increase the credit spread?

  A. Increase in the probability of default of the issuer.

  II. Decrease in risk premium.

  III. Decrease in loss given default of the issuer.

  IV. Increase in expected loss.

  B. I

  C. II and III

  D. I and IV

  E. I, II, and IV

  Correct Answer: C

• Question 259:

  Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD $1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of default increases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can reprice the loan, what should the new rate be?

  A. 10%

  B. 13%

  C. 16.5%

  D. 20.5%

  Correct Answer: D

• Question 260:

  Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be? What is the expected loss of this loan?

  A. $300

  B. $550

  C. $750

  D. $1,050

  Correct Answer: D