Skip to content

FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

Compared with public high-yield bonds, which characteristic of private credit most complicates a risk manager's measurement of portfolio volatility and drawdown?

Private credit is valued by models or appraisals rather than daily market prices, and updates are infrequent. This smooths reported returns, so measured volatility, correlation and drawdown understate true economic risk compared with public high-yield bonds that trade and are priced continuously.

  1. AValuations are model-based and infrequent, which can smooth reported returns and understate riskCorrect
  2. BPrivate credit loans always have fixed coupons, eliminating interest rate sensitivity
  3. CPrivate credit has more transparent daily prices
  4. DPrivate credit covenants are never negotiated

Explanation

Private loans lack observable market prices, so managers use appraisal or model valuations that update slowly. This produces smoothed returns, lower measured volatility and correlations, and understated drawdowns relative to public bonds. Private loans are mostly floating rate, not fixed, and have no daily prices.

Did you get it right without looking?

One question tells you little. A timed set on The Rise and Risks of Private Credit shows your real accuracy, how long you take and where you lose marks.

Practise The Rise and Risks of Private CreditFree diagnostic mock

More The Rise and Risks of Private Credit questions