6. Risk Management

Credit Risk — Quiz

Test your understanding of credit risk with 5 practice questions.

Practice Questions

Question 1

Given a constant hazard rate $\lambda=0.05$ per annum, what is the survival probability $S(3)$ at $T=3$ years in a reduced-form model?

Question 2

Assuming zero recovery, constant hazard $\lambda=0.05$ and risk-free rate $r=0.03$, what is the price $P(0,3)$ of a defaultable zero-coupon bond maturing in 3 years with face value 1?

Question 3

If the observed price of a zero-recovery, 3-year defaultable bond is $P(0,3)=0.80$ and $r=0.03$, what constant hazard rate $\lambda$ is implied?

Question 4

For a one-year exposure with constant hazard $\lambda=0.05$ and recovery rate $R=0.4$, what is the expected loss as a percentage of exposure?

Question 5

In the Merton structural model with $V_A=100,\ D=80,\ r=0.05,\ \sigma=0.2,\ T=1$, what is $d_2$?