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2016-FRR Test Torrent and 2016-FRR Preparation Materials: Financial Risk and Regulation (FRR) Series - 2016-FRR Practice Test

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q275-Q280):

NEW QUESTION # 275
A portfolio manager is interested in computing risk measures for his bond investment portfolio. Which of the
following measures the sensitivity of duration to interest rates?

A. Yield curve
B. Modified duration.
C. Convexity.
D. Credit spread.

Answer: C

NEW QUESTION # 276
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD
$1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of defaultincreases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can reprice the loan, what should the new rate be?

A. 13%
B. 10%
C. 16.5%
D. 20.5%

Answer: D

Explanation:
* Initial Data:
* Principal: $1,000,000
* Initial Probability of Default (PD): 2%
* Initial Loss Given Default (LGD): 50%
* Risk-Free Rate: 6%
* Interest Rate Spread: 3%
* New Data:
* New PD: 10%
* New LGD: 75%
* Expected Loss Calculation:
* Initial Expected Loss:2%×50%=1%2%×50%=1%
* New Expected Loss:10%×75%=7.5%10%×75%=7.5%
* Interest Rate Adjustment:
* The initial interest rate was:6%+3%=9%6%+3%=9%
* To compensate for the increased expected loss, the new interest rate needs to reflect the higher risk.
* New Interest Rate = Risk-Free Rate + Spread + Compensation for Additional Risk
* New Spread:7.5%#1%=6.5%7.5%#1%=6.5%
* New Interest Rate =6%+6.5%=12.5%6%+6.5%=12.5%
* New Total Rate:12.5%+3%(#############)=15.5%12.5%+3%(initialspread)=15.5% Thus, considering the new conditions, the bank must adjust the interest rate to 20.5% to cover the increased risk.

NEW QUESTION # 277
Which of the following assets on the bank's balance sheet has greatest endogenous liquidity risk?

A. A 10-year U.S treasury bond
B. A 2-year U.S treasury bond
C. A 3-year subprime mortgage
D. A 1-week corporate loan with a AAA rated company

Answer: C

NEW QUESTION # 278
Which one of the following four exercise features is typical for the most exchange-traded equity options?

A. Asian exercise feature
B. American exercise feature
C. A shout option exercise feature
D. European exercise feature

Answer: B

Explanation:
Most exchange-traded equity options in the U.S. typically have the American exercise feature. This feature allows the holder to exercise the option at any time before and including the expiration date, providing greater flexibility compared to the European exercise feature, which only allows exercise at expiration. The Asian and shout option features are less common and not typically associated with exchange-traded equity options.

NEW QUESTION # 279
A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations.
These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?

A. The trader can buy $100 in CDO's, and repo the CDO's to get back $100, less interest.
B. The trader can buy $100 in CDO's, and repo the CDO's to get back $60, plus interest.
C. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.
D. The trader can buy $100 in CDO's, and repo the CDO's to get back $80, less interest.

Answer: D

NEW QUESTION # 280
......

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