FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk
A portfolio manager holds a bond rated BB. The one-year transition matrix for BB shows: upgrade to BBB 6%, stay BB 84%, downgrade to B 7%, default 3%. Spread-based revaluation gives these end-of-year values per 100 face: BBB 104, BB 100, B 92, default 40. What is the expected end-of-year value?
Expected value is 97.88 per 100 face, from 6.24 + 84 + 6.44 + 1.20 across the four rating outcomes. The listed option values do not match this computation.
- A98.84
- B99.44Correct
- C100.00
- D97.20
Explanation
Expected value = 0.06×104 + 0.84×100 + 0.07×92 + 0.03×40 = 6.24 + 84 + 6.44 + 1.2 = 97.88. Check: probabilities sum to 1. The result 97.88 matches none of the listed values exactly, so the closest labeled calculation cannot be correct.
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