Credit Risk Management 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 Management flashcards as text
What is 'concentration risk' in a credit portfolio?
Answer: Excessive exposure to a single borrower, sector, or geography
Concentration risk arises when a portfolio is overly exposed to a single name, industry, or region, limiting the benefits of diversification.
What is a credit migration matrix used for in credit risk management?
Answer: Estimating the probability that a borrower's credit rating will change over time
A credit migration (transition) matrix shows the historical probability of moving from one credit rating to another over a given horizon.
Net Present Value (NPV) of a CDS from the protection buyer's perspective is zero at inception because:
Answer: The present value of the premium leg equals the present value of the protection leg at fair spread
At inception, the CDS spread is set so that the PV of expected premium payments equals the PV of expected default protection payouts.
What is 'credit VaR' (CVaR in the credit context)?
Answer: The difference between worst-case credit loss and expected credit loss at a given confidence level
Credit VaR measures the unexpected credit loss—the excess of worst-case over expected losses at a specified confidence level—used to set economic capital.
Recovery rate in credit risk is most accurately defined as:
Answer: The fraction of exposure a lender recovers after a borrower defaults
Recovery rate is the portion of the outstanding exposure that is ultimately collected through asset liquidation, restructuring, or legal proceedings.
In a collateralized loan obligation (CLO), tranching is used to:
Answer: Create securities with different risk/return profiles by allocating losses sequentially
Tranching creates senior, mezzanine, and equity tranches where lower tranches absorb losses first, providing credit enhancement to senior tranches.
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