Skip to content

FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A credit card portfolio is analyzed with monthly roll rates. Of accounts that are current, 4% move to 30 days past due. Of 30-day accounts, 50% roll to 60 days past due. Of 60-day accounts, 60% roll to 90+ days. Of 90+ accounts, 80% are charged off, and no accounts cure in this simplified chain. For 1,000,000 current balances, approximately what balance is eventually charged off following this chain?

About $9,600 is charged off. Multiply the successive roll rates: 4% x 50% x 60% x 80% equals 0.96%, and 0.96% of $1,000,000 is $9,600. Leaving out the final charge-off rate would give $12,000.

  1. A$9,600Correct
  2. B$16,000
  3. C$12,000
  4. D$19,200

Explanation

Cumulative roll: 0.04 x 0.50 x 0.60 x 0.80 = 0.00960. Applied to 1,000,000 gives $9,600. The $12,000 option omits the final 80% charge-off rate (0.04 x 0.5 x 0.6 = 1.2%). The $19,200 option omits the 60-day to 90+ step and uses 0.04 x 0.5 x 0.8 x ... incorrectly.

Did you get it right without looking?

One question tells you little. A timed set on Credit Scoring and Retail Credit Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Credit Scoring and Retail Credit Risk ManagementFree diagnostic mock

More Credit Scoring and Retail Credit Risk Management questions