Risk Assessment Flashcards
7 cards from real CIM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment flashcards as text
A bond has a modified duration of 6.5. If yields rise by 50 basis points, the approximate price change is:
Answer: -3.25%
Price change ≈ −6.5 × 0.005 = −3.25%.
Why is positive convexity valuable to a bondholder?
Answer: Prices rise more when yields fall than they drop when yields rise
Positive convexity gives an asymmetric price response that favors the bondholder.
A callable bond typically shows which characteristic when yields fall sharply?
Answer: Negative convexity
The call option caps price gains near the call price, which creates negative convexity.
Expected credit loss is calculated as:
Answer: Probability of default × loss given default × exposure at default
EL = PD × LGD × EAD is the standard expected-loss formula.
An investor who holds a bond to maturity mainly faces which interest-rate-related risk?
Answer: Reinvestment risk on coupons
Held to maturity, price fluctuations don't matter, but coupons must be reinvested at uncertain rates.
Widening credit spreads on a corporate bond, with Treasury yields unchanged, most likely means:
Answer: The market sees higher default risk for the issuer
A wider spread over Treasuries compensates investors for higher perceived credit risk.
Key rate durations are most useful for measuring exposure to:
Answer: Non-parallel shifts in the yield curve
Key rate durations show sensitivity to changes at specific maturities, which captures twists and changes in curvature.