2016-FRR TEST PRICE - EXAM 2016-FRR STUDY SOLUTIONS

2016-FRR Test Price - Exam 2016-FRR Study Solutions

2016-FRR Test Price - Exam 2016-FRR Study Solutions

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q282-Q287):

NEW QUESTION # 282
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. 16.5%
  • B. 13%
  • C. 10%
  • D. 20.5%

Answer: D

Explanation:
* Initial Data:
* Principal: $1,000,000
* Initial Probability of Default (PD): 2%
* Initial Loss Given Default (LGD): 50%
* Risk-Free Rate: 6%
* Interest Rate Spread: 3%
* New Data:
* New PD: 10%
* New LGD: 75%
* Expected Loss Calculation:
* Initial Expected Loss: 2%×50%=1%2%×50%=1%
* New Expected Loss: 10%×75%=7.5%10%×75%=7.5%
* Interest Rate Adjustment:
* The initial interest rate was: 6%+3%=9%6%+3%=9%
* To compensate for the increased expected loss, the new interest rate needs to reflect the higher risk.
* New Interest Rate = Risk-Free Rate + Spread + Compensation for Additional Risk
* New Spread: 7.5%1%=6.5%7.5%1%=6.5%
* New Interest Rate = 6%+6.5%=12.5%6%+6.5%=12.5%
* New Total Rate: 12.5%+3%()=15.5%12.5%+3%(initialspread)=15.5%
Thus, considering the new conditions, the bank must adjust the interest rate to 20.5% to cover the increased risk.


NEW QUESTION # 283
Which one of the following four statements on factors affecting the value of options is correct?

  • A. As time passes, options will increase in value.
  • B. As volatility rises, options increase in value.
  • C. As interest rates rise and option's rho is positive, option prices will decrease.
  • D. As the value of underlying security increases, the value of the put option increases.

Answer: B


NEW QUESTION # 284
A multinational bank just bought two bonds each worth $10,000. One of the bonds pays a fixed interest of 5% semi-annually and the other pays LIBOR semi-annually. The six month LIBOR is at 5% currently. The risk manager of the bank is concerned about the sensitivity to interest rates. Which of the following statements are true?

  • A. The given information is not enough to determine the sensitivity of the bond prices.
  • B. Both bond prices are equally sensitive to interest rates.
  • C. The price of the bond paying floating interest is more sensitive to interest rates than the bond paying fixed interest.
  • D. The price of the bond paying fixed interest is more sensitive to interest rates than the bond paying floating interest.

Answer: D

Explanation:
A bond that pays fixed interest is more sensitive to changes in interest rates than a bond that pays floating interest. This is because the fixed interest bond's coupon payments are constant, and its price will fluctuate more as interest rates change. In contrast, the floating interest bond adjusts its coupon payments according to the current interest rates, making its price less sensitive to changes in the market interest rates.


NEW QUESTION # 285
Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:

  • A. Equity to debt
  • B. Return on total assets
  • C. Sales to total assets
  • D. Return on equity

Answer: D

Explanation:
Altman's Z-score is a formula used to predict the likelihood of a company entering bankruptcy within a certain time frame. It incorporates several financial ratios, including return on total assets, sales to total assets, and equity to debt. However, it does not include return on equity. The variables in the Z-score are designed to measure different aspects of a company's financial health and operational efficiency, focusing on liquidity, profitability, leverage, solvency, and activity.


NEW QUESTION # 286
Which one of the following four alternatives lists the three most widely traded currencies on the global foreign
exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the
European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.

  • A. EUR, USD, JPY
  • B. JPY, EUR, USD
  • C. USD, EUR, JPY
  • D. USD, JPY, EUR

Answer: C


NEW QUESTION # 287
......

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