Credit Risk Management Default and Recovery Analysis 2

Question 1

What is a 'distressed debt' investment strategy?

Accepted Answer

Purchasing defaulted or near-default debt at a discount, expecting recovery or restructuring gains

Answer

Distressed debt investors buy securities of financially troubled companies at deep discounts, profiting if the company recovers or assets are liquidated above the purchase price.

Question 2

What is the 'absolute priority rule' in bankruptcy?

Accepted Answer

Senior creditors must be paid in full before junior creditors receive anything

Answer

The absolute priority rule holds that senior creditors must be fully satisfied before any value flows to junior creditors or equity holders in a bankruptcy proceeding.

Question 3

Which statistic tracks the percentage of a cohort of bonds that have defaulted within a specific number of years?

Accepted Answer

Cumulative default rate

Answer

The cumulative default rate measures the total fraction of an initial cohort that has defaulted by a given point in time, regardless of when in the period the default occurred.

Question 4

In credit risk, what is a 'workout' process?

Accepted Answer

A negotiated restructuring or repayment plan for a defaulted or distressed loan

Answer

A workout is the internal bank process of managing and resolving a problem loan, involving negotiations with the borrower on restructuring, forbearance, or recovery.

Question 5

What is 'haircut' in the context of collateral valuation for credit risk?

Accepted Answer

A reduction applied to collateral market value to reflect liquidity and price risk

Answer

A haircut is the percentage reduction applied to the market value of collateral to account for potential price declines and liquidity risk if the collateral must be liquidated.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Default and Recovery Analysis 2