Topic 7: Structured Products Q1: A bank has two loans outstanding. The first is a $100 million 1-year loan at the rate of 15% to a client with a BBB credit rating. The second is a 60 million 1- year loan at the rate of 20% to a client with a C credit rating. Historical data show that the 1-year probability of default for firms with a BBB rating is 4% while the same probability for firms with a rating of C is 7%. Investors are typically able to recover 35% and 20% of the notional value of an unsecured loan to BBB and C rated firms respectively. Which of the following values comes closest to the expected credit loss of the bank in this situation? a. 3 million b. $ 7 million c. $11 million d. $15 million Q5: Consider a CDO portfolio that consists of 100 loans, each having the notional value of $10 million. A mezzanine tranche of this structure has a notional value of $50 million with an attachment of 5% and width of 2%. The spread is 150 basis points. Assume the recovery rate is 45%. Which of the following percentages comes closest to the loss of this tranche if 11 defaults happen? a. 33% b. 43% c. 53% d. 63% Can someone show me how to do the numbers for this? I get the right answers but my numbers do not match exactly the answers given. I was wondering if the questions had a typo but it was a repeat of 2010 Sample questions used. Can someone assist?
Did you get the answers of the above? I saw these questions on CAIA site as well
Unfortunately, I only got the answers close to the ones listed. I got 100 Million * 0.04 * (1-0.35) = 2.6 60 Million * 0.07 * (1-0.20) = 3.36 = 5.96 So I picked (B) 7 Million since that is closest For the second one, since it will default, I simply look at the recovery rate of 45% and get 55% loss. So I pick 53% © I cannot get the exact answer.
For the first one, you need to include the coupon payment as well. So the exposure numbers would be 115 (100\*(1+15%) and 72 (60*(1+20%).