CFA Level I · CFA Level I Exam · Credit Risk
Compared with structural credit models, reduced-form credit models most likely:
Reduced-form models treat default as an exogenous random event whose likelihood is governed by a default intensity tied to observable variables. They do not model firm asset value or a debt threshold, which are features of structural models.
- Arequire the market value of the firm's assets to be modeled
- Btreat default as an exogenous random event driven by a default intensityCorrect
- Cassume default occurs when asset value falls below a specified debt threshold
Explanation
Reduced-form models do not model the firm's asset value or capital structure; default arrives as a surprise governed by an intensity (hazard rate) that depends on observable variables. The other two options describe structural models.
Did you get it right without looking?
One question tells you little. A timed set on Credit Risk shows your real accuracy, how long you take and where you lose marks.
More Credit Risk questions
- A bond has an exposure at default of $2,000,000, a probability of default of 3%, and a recovery rate of 40% of exposure. The expected loss i…
- Compared with a holding company's senior unsecured bonds, the senior unsecured bonds of its operating subsidiary most likely have a:
- In a structural model, holding other inputs constant, an increase in the volatility of the firm's asset value is most likely to:
- A bond is rated A by one agency and carries a stable outlook. Compared with a bond with the same rating but a negative outlook, the bond wit…
- Compared with a general obligation (GO) municipal bond, a revenue bond issued to fund a toll road is most likely to:
- A bond is issued with a seniority ranking of senior unsecured. All else equal, compared with a subordinated bond from the same issuer, its e…