Credit Risk Analysis Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Risk Analysis flashcards as text
What is a 'collateralized debt obligation' (CDO)?
Answer: A structured product that pools credit exposures and issues tranches with different seniority and risk profiles
A CDO repackages a pool of loans, bonds, or CDS into tranches (senior, mezzanine, equity) where losses are absorbed bottom-up, allowing investors to choose their preferred risk-return profile.
What is 'netting' in the context of counterparty credit risk?
Answer: Canceling out offsetting positive and negative mark-to-market values across multiple contracts with the same counterparty to reduce total exposure
Legal netting agreements allow a firm to offset gains and losses across multiple trades with a defaulted counterparty, significantly reducing gross credit exposure.
In Basel II/III, what does the 'internal ratings-based' (IRB) approach allow banks to do?
Answer: Use their own internal models to estimate PD, LGD, and EAD to calculate credit risk capital requirements
The IRB approach (foundation or advanced) lets banks use internal risk estimates to derive risk weights, resulting in more risk-sensitive capital requirements than the standardized approach.
What is 'recovery rate' in credit risk, and what is a typical value for senior unsecured bonds?
Answer: The fraction of the exposure recovered after default; typically 40% for senior unsecured bonds
Recovery rates vary by seniority and collateral; senior unsecured bonds historically recover around 40 cents on the dollar, implying an LGD of approximately 60%.
What is 'Credit Value Adjustment' (CVA)?
Answer: The market value of counterparty credit risk embedded in a derivative, representing the expected cost of counterparty default
CVA is the difference between the risk-free value of a derivative and its true value accounting for counterparty default risk; under Basel III banks must hold capital against CVA volatility.
What is a 'covered bond' and how does it differ from a standard bond in terms of credit risk?
Answer: A bond backed by a dedicated pool of high-quality assets (cover pool) that remains on the issuer's balance sheet, providing dual recourse to both issuer and collateral
Covered bonds give investors recourse to the issuing bank AND to the segregated cover pool (typically mortgages or public sector loans), making them lower risk than senior unsecured bonds.
How this page was made: written with AI tools and published by Nathan Beja, founder of Practice Test Geeks, who is responsible for its content. Exam facts are checked against the official sources listed below. Not reviewed by a subject-matter expert. Editorial policy
Sources & references
Exam facts on this page (fees, format, dates, passing scores) are checked against these official sources; the date is our last check. Editorial policy
- garp.org — Registration, renewal, score validity, eligibility, score release, test delivery, exam format, passing score, time limit, exam information · verified Nov 2026