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FRM Part II · FRM Exam Part II · VaR Mapping

A risk manager maps a portfolio of bonds to a set of vertices on the zero-curve for VaR purposes. Under the principal mapping approach, what is the key feature of how each bond is treated?

Principal mapping assigns the bond's entire market value to a single vertex, typically the one nearest its maturity. It ignores intermediate coupons, so it overstates risk for coupon bonds, unlike cash flow mapping, which spreads present values across several vertices.

  1. AEach bond's market value is allocated to a single vertex, usually the one closest to its maturityCorrect
  2. BEach bond's cash flows are split into present values assigned to the vertices of the curve
  3. CEach bond is represented by a single position matching its duration and no other cash flows are used
  4. DEach bond is represented by its yield volatility alone, with the principal ignored

Explanation

Principal mapping puts the whole bond value at one vertex corresponding to the bond's maturity (nearest vertex). Cash flow mapping instead splits the bond into its individual cash flows mapped to vertices. The duration approach matches duration, not maturity, so it is a different method.

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