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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A fund's private credit book has USD 200 million of unitranche loans at SOFR + 500 bps. Fund-level analysis shows that for each 100 bps rise in SOFR, borrower default probability rises by 1.5 percentage points, from a base of 3% at SOFR of 4%. Loss given default is 40% and is unchanged. SOFR rises to 6.5%. Assuming linearity, what is the increase in expected annual loss?

Expected annual loss rises by USD 3.0 million. A 250 bp increase lifts PD by 3.75 percentage points, and multiplying that by USD 200 million exposure and 40% loss given default gives 3.0 million. Ignoring LGD would overstate the increase at 7.5 million.

  1. AUSD 3.0 millionCorrect
  2. BUSD 4.5 million
  3. CUSD 7.5 million
  4. DUSD 1.2 million

Explanation

The rise is 250 bps, so PD increases by 2.5 x 1.5 = 3.75 points, to 6.75%. The change in EL = 200m x 3.75% x 40% = USD 3.0 million. USD 4.5m would use PD of 3.75 points with no LGD... actually 200 x 3.75% = 7.5m (option C) ignores LGD; USD 4.5m wrongly uses 150 bps.

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