PRMIA Credit and Counterparty Risk Manager (CCRM) Certificate — Questions and Answers

Question 1: What is a CDX index?

A risk model developed by ISDA for OTC derivatives
A stock index focused on credit card companies
A credit scoring benchmark published by the Federal Reserve
A standardized CDS index referencing a basket of North American corporate credits (Correct answer)

Correct answer: A standardized CDS index referencing a basket of North American corporate credits

CDX is a family of standardized CDS indices (e.g., CDX.NA.IG for North American investment grade) that allow traders to gain or hedge broad credit market exposure efficiently.

Question 2: Under Basel II, which approach allows banks to use their own estimates of PD, LGD, and EAD?

Foundation IRB approach
Basic indicator approach
Standardized approach
Advanced IRB approach (Correct answer)

Correct answer: Advanced IRB approach

The Advanced Internal Ratings-Based (A-IRB) approach permits banks to estimate all three key parameters (PD, LGD, EAD) internally, subject to supervisory approval.

Question 3: A portfolio manager applies credit VaR at a 99.9% confidence level over a one-year horizon. This metric is best used to:

Price individual loan facilities
Determine regulatory minimum capital under Pillar 1
Calculate expected loss reserves for accounting purposes
Set economic capital buffers to absorb unexpected credit losses (Correct answer)

Correct answer: Set economic capital buffers to absorb unexpected credit losses

Credit VaR at high confidence levels quantifies unexpected losses and is used to set economic capital to absorb tail credit risk.

Question 4: In the Merton model, what event triggers default?

When asset value falls below the debt face value at maturity (Correct answer)
When interest rates exceed a threshold
When the credit spread widens beyond 500 bps
When earnings before tax turn negative

Correct answer: When asset value falls below the debt face value at maturity

In the Merton model, default occurs at debt maturity if the firm's asset value is below the face value of debt, leaving equity holders with nothing.

Question 5: Under Pillar 2 of Basel II/III, what is the primary responsibility of supervisors?

Setting minimum capital ratios
Reviewing banks' internal capital adequacy processes (ICAAP) (Correct answer)
Requiring public disclosure of risk metrics
Setting liquidity coverage ratios

Correct answer: Reviewing banks' internal capital adequacy processes (ICAAP)

Pillar 2 (Supervisory Review Process) requires supervisors to evaluate each bank's ICAAP and ensure capital is adequate for its specific risk profile.

Question 6: In a collateralized loan obligation (CLO), what is the primary function of the 'equity tranche'?

To hedge interest rate risk within the structure
To provide liquidity support during market dislocations
To provide the highest credit quality and first claim on cash flows
To absorb first losses and receive residual cash flows after senior tranches are paid (Correct answer)

Correct answer: To absorb first losses and receive residual cash flows after senior tranches are paid

The equity tranche (also called the 'first-loss piece') absorbs initial losses, protecting senior tranches, and receives any residual income after all senior obligations are met.

Question 7: A Credit Valuation Adjustment (CVA) desk at a bank primarily manages risk by:

Conducting internal stress tests of the bank's liquidity buffers
Approving new counterparty credit limits for derivative transactions
Setting loan loss provisions for the corporate lending portfolio
Hedging the CVA P&L volatility using CDS, index options, and swaptions (Correct answer)

Correct answer: Hedging the CVA P&L volatility using CDS, index options, and swaptions

The CVA desk dynamically hedges the CVA P&L using credit default swaps on individual counterparties, CDS indices, and interest rate or cross-currency hedges to neutralize market and credit sensitivity.

Question 8: What is the 'information value' (IV) metric used for in scorecard development?

Estimating exposure at default
Calculating the loss given default
Measuring the capital charge for a loan
Selecting predictive variables for a credit scorecard (Correct answer)

Correct answer: Selecting predictive variables for a credit scorecard

Information Value measures how well a variable separates good and bad borrowers, guiding feature selection in scorecard development.

Question 9: A Gini coefficient of 0 in a credit model indicates what?

Random discrimination (Correct answer)
Perfect discrimination
Moderate discrimination
Inverse discrimination

Correct answer: Random discrimination

A Gini of 0 means the model has no discriminatory power and performs no better than random assignment.

Question 10: What does 'economic capital' represent in credit portfolio management?

The market capitalization of the bank
The capital a bank internally determines is needed to cover unexpected losses at a target solvency level (Correct answer)
The minimum regulatory capital mandated by Basel
The total loan loss reserves held against expected losses

Correct answer: The capital a bank internally determines is needed to cover unexpected losses at a target solvency level

Economic capital is an internal estimate of the capital needed to remain solvent at a target confidence level, often higher than regulatory minimums.

Question 11: What does 'seniority' of a debt claim refer to in the context of recovery?

The age of the loan in years
The currency denomination of the debt
The credit rating of the issuer
The priority of repayment in the event of bankruptcy or liquidation (Correct answer)

Correct answer: The priority of repayment in the event of bankruptcy or liquidation

Seniority determines the order in which creditors are repaid; senior secured creditors are paid first, followed by senior unsecured, subordinated, and equity holders.

Question 12: Debit Value Adjustment (DVA) in derivatives pricing accounts for:

The bank's own credit risk as viewed from the counterparty's perspective (Correct answer)
The credit risk of the counterparty to the bank
The expected recovery rate on collateral held by the bank
Changes in the risk-free discount rate over the trade's life

Correct answer: The bank's own credit risk as viewed from the counterparty's perspective

DVA reflects the value of the bank's own default risk to the counterparty — it is the benefit the bank receives because it could default on its obligations.

Question 13: What credit scoring method assigns weights to financial ratios to produce a single bankruptcy prediction score?

Monte Carlo simulation
KMV model
Altman Z-score (Correct answer)
CreditMetrics

Correct answer: Altman Z-score

The Altman Z-score combines five weighted financial ratios (working capital, retained earnings, EBIT, market cap, sales) to predict corporate bankruptcy probability.

Question 14: What is the primary purpose of an Initial Margin (IM) in bilateral OTC derivatives?

To meet regulatory minimum capital requirements for the bank
To cover potential future exposure from the time of default to the close-out of positions (Correct answer)
To compensate the counterparty for the bid-ask spread on the trade
To fund the settlement of daily profit and loss between counterparties

Correct answer: To cover potential future exposure from the time of default to the close-out of positions

Initial margin protects against the market risk of a portfolio during the margin period of risk (MPOR) — the period between a counterparty's last collateral posting and the close-out of positions after default.

Question 15: In counterparty credit risk management, a 'break clause' (or mutual put) in a long-dated derivatives contract serves to:

Transfer counterparty risk to a guarantor entity at periodic intervals
Allow regulators to terminate the contract if systemic risk thresholds are breached
Require the posting of additional collateral when credit ratings fall below investment grade
Limit counterparty credit risk exposure by giving either party the right to terminate at predetermined dates (Correct answer)

Correct answer: Limit counterparty credit risk exposure by giving either party the right to terminate at predetermined dates

Break clauses give one or both counterparties the option to terminate the trade at specified future dates, capping the exposure horizon and reducing long-dated counterparty credit risk.

Question 16: Which of the following is a reduced-form credit risk model?

Altman Z-Score
Jarrow-Turnbull model (Correct answer)
Merton model
KMV model

Correct answer: Jarrow-Turnbull model

The Jarrow-Turnbull model is a reduced-form model that treats default as a Poisson process with an intensity driven by market variables.

Question 17: Under Basel III, the Standardized Approach for Counterparty Credit Risk (SA-CCR) replaced the Current Exposure Method primarily because:

It required financial institutions to use internal models for all derivative exposures
It reduced capital requirements across all asset classes
It better recognizes the risk-reducing effects of netting, collateral, and hedging (Correct answer)
It eliminated the need for computing potential future exposure add-ons

Correct answer: It better recognizes the risk-reducing effects of netting, collateral, and hedging

SA-CCR was designed to more accurately reflect actual exposures by properly accounting for netting, collateral, and market risk factors across asset classes.

Question 18: In counterparty credit risk, the Margin Period of Risk (MPOR) is defined as:

The maximum tenor of a transaction eligible for netting under an ISDA agreement
The duration over which a credit derivative provides protection
The time from the last margin call to the completion of close-out and re-hedging after a counterparty default (Correct answer)
The period during which a collateral agreement is legally contested

Correct answer: The time from the last margin call to the completion of close-out and re-hedging after a counterparty default

MPOR represents the time window during which exposure is unhedged after a counterparty defaults — regulators require a minimum MPOR of 10 business days for most collateralized OTC transactions.

Question 19: Credit Default Swaps (CDS) are used in portfolio management primarily to do what?

Transfer credit risk to a third party without selling the underlying loan (Correct answer)
Convert fixed-rate loans to floating-rate
Reduce interest rate duration
Generate fee income from loan origination

Correct answer: Transfer credit risk to a third party without selling the underlying loan

CDS allow banks to hedge credit exposure by transferring default risk to a protection seller, reducing concentration without disposing of the actual loan.

Question 20: What does CVA stand for in derivatives pricing?

Central Variation Amount
Credit Valuation Adjustment (Correct answer)
Collateral Value Adjustment
Counterparty Verification Algorithm

Correct answer: Credit Valuation Adjustment

CVA is the market value of counterparty credit risk in a derivatives portfolio; it represents the expected loss from counterparty default, net of recovery.

Question 21: A bank's internal credit model is found to be systematically underestimating PDs during economic expansions. This is a classic symptom of:

Basis risk in hedging instruments
Model overfitting to training data
Wrong-way risk in counterparty exposures
Procyclicality in point-in-time rating models (Correct answer)

Correct answer: Procyclicality in point-in-time rating models

Point-in-time models underestimate risk in good times and overestimate it in downturns, creating procyclical capital requirements.

Question 22: Under a standard ISDA Master Agreement, netting reduces counterparty credit risk by:

Allowing positive and negative mark-to-market values across transactions to offset each other (Correct answer)
Transferring credit risk to a central counterparty
Capping the maximum exposure at the notional amount
Requiring additional collateral posting when exposure exceeds a threshold

Correct answer: Allowing positive and negative mark-to-market values across transactions to offset each other

Close-out netting under an ISDA agreement allows offsetting of gains and losses across all transactions with a counterparty upon default, reducing gross exposure to a net figure.

Question 23: What is a 'credit-linked note' (CLN)?

A government bond with a floating-rate coupon
A convertible bond with a credit enhancement feature
A funded credit instrument that embeds a CDS, where the investor's principal is at risk if a credit event occurs (Correct answer)
A note whose coupon is linked to the issuer's own credit rating

Correct answer: A funded credit instrument that embeds a CDS, where the investor's principal is at risk if a credit event occurs

A CLN is a funded version of a CDS: the investor provides upfront cash, earns an enhanced coupon, but loses some or all principal if the reference entity experiences a credit event.

Question 24: In credit risk, what is a 'workout' process?

Automated loan origination using machine learning
A process for upgrading borrowers' credit ratings
A negotiated restructuring or repayment plan for a defaulted or distressed loan (Correct answer)
Fitness programs for bank employees managing stress

Correct answer: A negotiated restructuring or repayment plan for a defaulted or distressed loan

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 25: Which validation metric measures the area under the Receiver Operating Characteristic (ROC) curve?

AUROC (AUC) (Correct answer)
F1 score
Gini coefficient
Kolmogorov-Smirnov (KS) statistic

Correct answer: AUROC (AUC)

AUROC (Area Under the ROC Curve) measures overall discriminatory power of a credit model across all possible classification thresholds.

Question 26: Which of the aforementioned claims is true?

The balance sheet lists assets and liabilities as a particular date (Correct answer)
The balance sheet shows the growth of sales over a year
The P/L statement is a snapshot of the business on one day
The P/L Statement of Sources and application of funds is a snapshot of the business on one day

Correct answer: The balance sheet lists assets and liabilities as a particular date

Explanation: ‥ The balance sheet, also known as the statement of financial position, presents the financial position of a business at a particular point in time, typically the end of a reporting period, such as a month, quarter, or year. It lists the assets, liabilities, and equity of the business as of that specific date. The balance sheet does not reflect the growth of sales over a year; it primarily focuses on the financial position rather than the income or expenses.

Question 27: What distinguishes a 'funded' credit derivative from an 'unfunded' one?

Funded derivatives have no credit event triggers; unfunded have multiple
Funded derivatives are exchange-traded; unfunded are OTC
In funded structures, the investor provides upfront cash; in unfunded (like CDS), no upfront principal is exchanged (Correct answer)
Funded structures offer no return to investors; unfunded structures do

Correct answer: In funded structures, the investor provides upfront cash; in unfunded (like CDS), no upfront principal is exchanged

Funded credit derivatives (e.g., CLNs, CDOs) require the investor to post cash upfront, whereas unfunded derivatives (e.g., CDS) involve no principal transfer at inception.

Question 28: A credit analyst is reviewing a leveraged buyout (LBO) target. Which metric is most critical for assessing the target's ability to service its post-acquisition debt load?

Return on Equity (ROE)
EBITDA-to-debt service coverage (Correct answer)
Current ratio
Price-to-Earnings (P/E) ratio

Correct answer: EBITDA-to-debt service coverage

EBITDA-to-debt service coverage directly measures whether the target's operating cash flow can cover LBO-related interest and principal payments.

Question 29: What is 'attachment point' in a CDO or tranche structure?

The minimum credit rating required for inclusion in a CLO
The date when interest payments begin on a tranche
The initial margin posted by the protection buyer
The portfolio loss level at which a tranche starts experiencing losses (Correct answer)

Correct answer: The portfolio loss level at which a tranche starts experiencing losses

The attachment point defines the cumulative portfolio loss percentage at which a given tranche begins absorbing losses; below the attachment point, more junior tranches bear the loss.

Question 30: The term "operational statement" refers to which of the following statements?

Balance Sheet
Unaudited Statement
Funds flow statement
P & L statement (Correct answer)

Correct answer: P & L statement

Explanation: The statement "P & L statement" is also known as the operating statement. The P & L statement, which stands for Profit and Loss statement, is an important financial statement that summarizes the revenues, expenses, and resulting profits or losses of a company during a specific period of time, typically a month, quarter, or year. It is commonly referred to as the operating statement because it focuses on the operating activities of the business, including revenue generation and the associated costs and expenses directly related to the company's core operations. The P & L statement provides insights into the company's ability to generate profits and assesses its overall financial performance.

Question 31: Which statistical technique is commonly used to build retail credit scorecards?

Monte Carlo simulation
Principal component analysis
Cointegration analysis
Logistic regression (Correct answer)

Correct answer: Logistic regression

Logistic regression is the industry-standard technique for retail credit scorecards due to its interpretability and probabilistic output.

Question 32: A portfolio manager wants to measure the credit risk contribution of a single loan to the overall portfolio VaR. Which concept captures this marginal contribution?

Expected Shortfall (ES)
Credit Value at Risk (CVaR) component
Standalone VaR
Marginal VaR (MVaR) (Correct answer)

Correct answer: Marginal VaR (MVaR)

Marginal VaR measures the incremental change in portfolio VaR from adding or removing a single position, capturing diversification effects.

Question 33: Which of the following best describes 'wrong-way risk' in counterparty credit risk management?

Risk from incorrect valuation models for derivatives
Risk that exposure increases when the counterparty's credit quality deteriorates (Correct answer)
Risk that netting agreements are unenforceable in a default scenario
Risk that collateral value increases when counterparty defaults

Correct answer: Risk that exposure increases when the counterparty's credit quality deteriorates

Wrong-way risk occurs when exposure to a counterparty is positively correlated with the counterparty's probability of default, increasing potential loss.

Question 34: Which machine learning model is increasingly used for credit scoring due to its ability to capture non-linear relationships?

Ordinary least squares
Moving average models
Linear regression
Gradient boosting (e.g., XGBoost) (Correct answer)

Correct answer: Gradient boosting (e.g., XGBoost)

Gradient boosting models like XGBoost capture complex non-linear patterns in credit data and often outperform logistic regression.

Question 35: In the context of counterparty credit risk, the 'Threshold' in a CSA refers to:

The confidence level used to compute Potential Future Exposure
The minimum credit rating a counterparty must maintain to transact
The unsecured exposure level below which no collateral is required (Correct answer)
The maximum notional amount permitted under the master agreement

Correct answer: The unsecured exposure level below which no collateral is required

The threshold is the level of mark-to-market exposure up to which no collateral call is made; only exposure exceeding the threshold triggers a margin call.

Question 36: What is 'counterparty credit risk' in derivatives?

The risk that the counterparty to a derivative contract fails to fulfill its obligations (Correct answer)
The risk that collateral pledged by the counterparty declines in value
The risk that the underlying reference entity defaults on its bonds
The risk that market rates move against the position

Correct answer: The risk that the counterparty to a derivative contract fails to fulfill its obligations

Counterparty credit risk is the risk that a derivatives counterparty defaults before the final settlement of the contract, resulting in a mark-to-market loss.

Question 37: A retail bank wants to segment its mortgage portfolio by expected credit performance. Which approach is most appropriate for developing segmentation?

CAPM-based risk factor analysis
Duration matching
Logistic regression scorecard development (Correct answer)
Discounted cash flow analysis

Correct answer: Logistic regression scorecard development

Logistic regression is the industry standard for developing credit scorecards that predict the probability of default and segment borrowers by risk.

Question 38: Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?

2.0%
6.0%
8.0%
4.5% (Correct answer)

Correct answer: 4.5%

Basel III requires banks to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets, representing the highest quality capital buffer.

Question 39: Which measure, used as an alternative to VaR, calculates the average loss in the worst scenarios beyond the confidence threshold?

Expected Shortfall (ES) / Conditional VaR (Correct answer)
Sharpe Ratio
Information Ratio
Expected Loss (EL)

Correct answer: Expected Shortfall (ES) / Conditional VaR

Expected Shortfall (also called CVaR or ES) measures the average of all losses beyond the VaR threshold, providing a more complete picture of tail risk.

Question 40: Variation Margin (VM) in OTC derivatives is exchanged to:

Compensate for credit spread widening of the counterparty
Cover exposure that might arise over the life of the trade
Meet initial posting requirements at trade inception
Settle the daily mark-to-market changes in portfolio value (Correct answer)

Correct answer: Settle the daily mark-to-market changes in portfolio value

Variation margin is collected or paid daily (or intraday) to reflect the current mark-to-market value of the portfolio, keeping net exposure near zero.

Question 41: Professional business analysts for credit risk should be knowledgeable in the following fields, except

Credit products
General finance
Tax accounting rules
Knowledge based (Correct answer)

Correct answer: Knowledge based

Explanation: A Business Analyst for Credit Risk professional must have sound knowledge in various areas related to credit risk management. However, it is not accurate to say that they must have knowledge in "Knowledge based" as a specific area.

Question 42: Which technique involves assigning risk weights to off-balance-sheet commitments to convert them to credit risk equivalent on-balance-sheet exposures?

Credit value adjustment (CVA)
Mark-to-market adjustment
Loan loss provisioning
Credit Conversion Factor (CCF) application (Correct answer)

Correct answer: Credit Conversion Factor (CCF) application

The Credit Conversion Factor (CCF) converts off-balance-sheet exposures (like undrawn commitments) to credit equivalent amounts for risk-weighting purposes.

Question 43: In a synthetic CDO, credit risk is transferred through what mechanism?

Issuing covered bonds backed by mortgage collateral
Credit default swaps referencing a portfolio of names (Correct answer)
Loan participations sold to institutional investors
Physical sale of the underlying loans to investors

Correct answer: Credit default swaps referencing a portfolio of names

A synthetic CDO uses CDS contracts rather than actual loan transfers, allowing the originator to retain the assets while distributing credit risk to investors.

Question 44: Which metric measures portfolio credit risk at a given confidence level over a specified horizon?

Expected Loss (EL)
Credit VaR (Value at Risk) (Correct answer)
Net Interest Margin
Return on Equity

Correct answer: Credit VaR (Value at Risk)

Credit VaR estimates the maximum credit loss that will not be exceeded at a given confidence level (e.g., 99.9%) over a defined time horizon.

Question 45: In logistic regression credit scoring, what is the output variable range?

−∞ to +∞
0 to 100
−1 to 1
0 to 1 (Correct answer)

Correct answer: 0 to 1

Logistic regression uses the sigmoid function to constrain output between 0 and 1, making it suitable for modeling default probabilities.

Question 46: What is the difference between a 'point-in-time' (PIT) and 'through-the-cycle' (TTC) PD estimate?

PIT is used for regulatory capital; TTC is used for provisioning
PIT reflects current economic conditions; TTC is averaged over a cycle (Correct answer)
PIT applies to retail; TTC applies to wholesale
PIT uses market data; TTC uses accounting data

Correct answer: PIT reflects current economic conditions; TTC is averaged over a cycle

PIT estimates reflect current economic conditions and vary with the cycle, while TTC estimates are averaged across the full economic cycle.

Question 47: The 'Alpha' multiplier (typically set at 1.4) in the Basel CCR framework is applied to:

The Effective EPE to convert it into a stressed Exposure at Default measure (Correct answer)
The loss given default on secured counterparty exposures
The probability of default for counterparties with no external rating
The recovery rate assumption for central counterparties

Correct answer: The Effective EPE to convert it into a stressed Exposure at Default measure

The alpha factor of 1.4 (set by regulators) scales the Effective EPE upward to account for model uncertainty and the difference between EPE and full economic exposure at default.

Question 48: A bank identifies that its retail auto loan portfolio has a Gini coefficient of 0.45 on its credit scorecard. What does this indicate?

The scorecard has moderate to good discriminatory power (Correct answer)
The scorecard perfectly separates defaulters from non-defaulters
The scorecard is over-fitted and should be rebuilt
The scorecard has very poor discriminatory power

Correct answer: The scorecard has moderate to good discriminatory power

A Gini coefficient of 0.45 (equivalent to an AUC of ~0.725) represents moderate-to-good discriminatory power for a retail credit scorecard.

Question 49: What is a 'total return swap' (TRS) in credit markets?

An agreement to exchange credit ratings on two reference entities
A swap exchanging fixed-rate loan payments for floating-rate payments
A swap where one party pays total economic returns (income + capital gains/losses) on a reference asset in exchange for a floating rate payment (Correct answer)
A transaction where default risk is transferred without income transfer

Correct answer: A swap where one party pays total economic returns (income + capital gains/losses) on a reference asset in exchange for a floating rate payment

In a TRS, the total return payer passes all economic exposure (coupons plus price appreciation or depreciation) of a reference asset to the total return receiver in exchange for SOFR plus a spread.

Question 50: What is a Credit Default Swap (CDS)?

A bilateral contract where the protection buyer pays a premium to hedge against a credit event on a reference entity (Correct answer)
A bond with floating-rate coupons tied to SOFR
A loan participation agreement between two banks
An exchange-traded equity option on a bank's stock

Correct answer: A bilateral contract where the protection buyer pays a premium to hedge against a credit event on a reference entity

A CDS is an OTC derivative where the protection buyer pays periodic premiums to the seller, who compensates the buyer if the reference entity experiences a defined credit event.

Question 51: Which credit risk transfer mechanism allows a bank to buy protection on a basket of reference entities, where the protection seller pays out only on the first default in the basket?

First-to-Default Basket CDS (Correct answer)
Credit-Linked Note
Synthetic CDO equity tranche
Total Return Swap

Correct answer: First-to-Default Basket CDS

A first-to-default basket CDS triggers a payout upon the first default among the reference entities in the basket, giving concentrated protection at lower cost.

Question 52: What does the Basel III leverage ratio measure?

Liquid assets as a percentage of net cash outflows
Tier 1 capital as a percentage of risk-weighted assets
Common equity as a percentage of total deposits
Tier 1 capital as a percentage of total exposure (non-risk-based) (Correct answer)

Correct answer: Tier 1 capital as a percentage of total exposure (non-risk-based)

The Basel III leverage ratio is a non-risk-based backstop measure defined as Tier 1 capital divided by total exposure, with a minimum requirement of 3%.

Question 53: Under the Advanced IRB approach, which parameter does the bank estimate internally rather than using supervisory estimates?

Regulatory correlation factors
Risk weight functions
Probability of Default (PD) only
PD, LGD, and EAD (Correct answer)

Correct answer: PD, LGD, and EAD

Under Advanced IRB, banks estimate PD, LGD, and EAD internally, while under Foundation IRB only PD is estimated internally.

Question 54: What is the primary purpose of a 'credit bureau' in the consumer lending ecosystem?

To regulate fair lending practices under the ECOA
To insure banks against consumer loan defaults
To collect and report individual borrower credit histories to lenders (Correct answer)
To set interest rate ceilings on consumer loans

Correct answer: To collect and report individual borrower credit histories to lenders

Credit bureaus (Equifax, Experian, TransUnion) collect, maintain, and report consumer credit histories to help lenders assess individual creditworthiness.

Question 55: A financial institution uses 'credit risk transfer' through loan sales. What is the primary regulatory concern with this practice?

It creates excessive concentration in the acquiring institution
It may create moral hazard by reducing originator incentives for credit quality (Correct answer)
It violates banking secrecy laws in most jurisdictions
It increases the bank's capital requirements significantly

Correct answer: It may create moral hazard by reducing originator incentives for credit quality

When banks can offload credit risk, they may relax underwriting standards since they bear less of the downside risk — a classic moral hazard problem seen in the 2008 crisis.

Question 56: What does the term 'PD' stand for in credit risk modeling?

Probability of Default (Correct answer)
Portfolio Duration
Partial Disclosure
Payment Delay

Correct answer: Probability of Default

PD (Probability of Default) is the likelihood that a borrower will fail to meet its debt obligations over a specified time horizon.

Question 57: What is a 'distressed debt' investment strategy?

Lending to startups with no credit history
Purchasing defaulted or near-default debt at a discount, expecting recovery or restructuring gains (Correct answer)
Buying highly rated bonds for yield enhancement
Short-selling investment-grade bonds

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

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 58: What does the CDS spread represent?

The credit rating difference between two reference entities
The discount rate used to value the reference bond
The difference between bid and ask prices for the reference bond
The annual premium (in basis points) paid by the protection buyer as a percentage of notional (Correct answer)

Correct answer: The annual premium (in basis points) paid by the protection buyer as a percentage of notional

The CDS spread is the annualized cost of credit protection, expressed in basis points of notional; it reflects the market's implied probability of a credit event.

Question 59: A bank uses the Standardized Approach for credit risk. A corporate loan with a BBB rating receives what risk weight under Basel III?

100% (Correct answer)
50%
20%
150%

Correct answer: 100%

Under the Basel III Standardized Approach, unrated and BBB-rated corporate exposures generally receive a 100% risk weight.

Question 60: Which statistical model estimates the probability of default by regressing binary default outcomes against borrower characteristics?

Logistic regression (Correct answer)
Moving average model
Linear regression
Principal component analysis

Correct answer: Logistic regression

Logistic regression models the probability of a binary outcome (default/non-default) as a function of borrower financial variables.

PRMIA Credit and Counterparty Risk Manager (CCRM) Certificate

The PRMIA CCRM Certificate assesses mastery of credit risk fundamentals, counterparty credit risk, CVA/DVA, credit derivatives, credit portfolio management, and Basel regulatory frameworks for financial risk professionals.

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