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Which among the following describes fixed income?
I. The interest on credit
II. Obligation to repay
III. An expectation of repayment
IV. The profile of repayment
The terms credit, debt and fixed income are used interchangeably in this study manual. Credit is an investment that carries an expectation of repayment; debt, as the obligation to repay, is the other side of the coin; fixed income is the profile of repayment.
The terms credit, debt and fixed income are used interchangeably in this study manual. Credit is an investment that carries an expectation of repayment; debt, as the obligation to repay, is the other side of the coin; fixed income is the profile of repayment.
Which among the following describes “a transition matrix”?
I. The status of the loan in the last period is compared to its status in the current period
II. The status of the loan is decided on the basis of first month of repayment
III. The status of the loan is decided on the basis of first twelve months of repayment
IV. The status of the loan is decided on the basis of lastmonth of repayment
The stages of delinquency (and associated state probabilities) may be described in what is known as a transition matrix, where the status of the loan in the last period is compared to its status in the current period. Most loans do not change status. Those that habitually pay on time remain current. Those that miss a payment may make one payment so that they remain delinquent in the same degree; or they may pay up to regain current status (cure) while others fail to make a payment and become more delinquent. This information can be used to predict the future by considering the transitions as state probabilities, although from experience, these percentages will change over time.
The stages of delinquency (and associated state probabilities) may be described in what is known as a transition matrix, where the status of the loan in the last period is compared to its status in the current period. Most loans do not change status. Those that habitually pay on time remain current. Those that miss a payment may make one payment so that they remain delinquent in the same degree; or they may pay up to regain current status (cure) while others fail to make a payment and become more delinquent. This information can be used to predict the future by considering the transitions as state probabilities, although from experience, these percentages will change over time.
Which among the following defines cash-flow statements?
I. A method to predict future cash resources
II. Representation of the entity’s economic resources (assets) and financial obligations (liabilities), with the assets arrayed in a column to the left of the liabilities and where ranking order follows liquidity, with the most liquid assets and liabilities listed at the top. The aggregate value of the assets is assumed to equal the aggregate value of the liabilities
III. A method in which past expenditure of assets is used to extrapolate future cash resources
IV. An analysis of the sources and uses of funds, partitioned into operating, financing and investing sub-analyses, to produce a snapshot of the firm’s year-on-year liquidity position
From a credit perspective, the balance sheet is very useful and flexible because it facilitates discussion about how resources can be mobilized to generate the future cash needed to repay the lender. However, it provides limited information about sources and uses of capital during the year.
This is provided to some extent in the income statement or P&L – profit and loss. The income statement is the other accounting statement general enough to be useful in extrapolating future cash resources. However, it should never be confused as a proxy for cash flow analysis. This is done in the cash flow statement (or funds flow statement), an analysis of the sources and uses of funds, partitioned into operating, financing and investing sub-analyses, to produce a snapshot of the firm’s year-on-year liquidity position.
No line item in any of these three financial statements addresses credit risk singly or directly. Rather, the magnitude and likelihood of credit risk on a particular obligation emerges from assessing the borrower’s financial capacity from these (and other) required disclosures.
From a credit perspective, the balance sheet is very useful and flexible because it facilitates discussion about how resources can be mobilized to generate the future cash needed to repay the lender. However, it provides limited information about sources and uses of capital during the year.
This is provided to some extent in the income statement or P&L – profit and loss. The income statement is the other accounting statement general enough to be useful in extrapolating future cash resources. However, it should never be confused as a proxy for cash flow analysis. This is done in the cash flow statement (or funds flow statement), an analysis of the sources and uses of funds, partitioned into operating, financing and investing sub-analyses, to produce a snapshot of the firm’s year-on-year liquidity position.
No line item in any of these three financial statements addresses credit risk singly or directly. Rather, the magnitude and likelihood of credit risk on a particular obligation emerges from assessing the borrower’s financial capacity from these (and other) required disclosures.
Over the past quarter of a century, investment theory has developed rapidly in tandem with the rise of global capital markets. Which among the following are the basic assumptions on which modern investment theory is based?
I. An asset should trade at the same real price in all markets. Law of one price.
II. Rationality leads investors to adapt their expectations and act accordingly when new information becomes available. This keeps price and value aligned. Efficient market hypothesis.
III. Rational investors seek to maximize their returns on investment. Utility maximization.
IV. No arbitrage condition: a major assumption underlying market efficiency and equilibrium.
Over the past quarter of a century, investment theory has developed rapidly in tandem with the rise of global capital markets. Some basic assumptions on which modern investment theory is based are:
1. Rational investors seek to maximize their returns on investment. Utility maximization.
2. Rationality leads investors to adapt their expectations and act accordingly when new information becomes available. This keeps price and value aligned. Efficient market hypothesis.
3. An asset should trade at the same real price in all markets. Law of one price.
4. If price discrepancies exist, someone will make a certain profit without risk by borrowing at the risk free rate, buying the cheap asset, simultaneously selling the rich asset, repaying the loan with the proceeds and pocketing the difference. Arbitrage.
5. No arbitrage condition: a major assumption underlying market efficiency and equilibrium.
6. Risk-return tradeoff: the inverse of the law of one price. Rational investors will accept marginally more risk only if they expect to gain higher returns thereby and vice versa.
Over the past quarter of a century, investment theory has developed rapidly in tandem with the rise of global capital markets. Some basic assumptions on which modern investment theory is based are:
1. Rational investors seek to maximize their returns on investment. Utility maximization.
2. Rationality leads investors to adapt their expectations and act accordingly when new information becomes available. This keeps price and value aligned. Efficient market hypothesis.
3. An asset should trade at the same real price in all markets. Law of one price.
4. If price discrepancies exist, someone will make a certain profit without risk by borrowing at the risk free rate, buying the cheap asset, simultaneously selling the rich asset, repaying the loan with the proceeds and pocketing the difference. Arbitrage.
5. No arbitrage condition: a major assumption underlying market efficiency and equilibrium.
6. Risk-return tradeoff: the inverse of the law of one price. Rational investors will accept marginally more risk only if they expect to gain higher returns thereby and vice versa.
One of the most widely accepted formalisms for pricing contingent claims is the Black-Scholes formula. Which among the following are the key components of this formula?
I. the assumption that stock prices follow the model of geometric Brownian motion
II. market data
III. the structure of payoffs at maturity (which are known)
IV. credit rating
Contingent claim pricing theory provides an alternative foundation to credit ratings for credit risk evaluation. The term “contingent claim” refers to options: financial assets that confer the right but not the obligation to buy or sell an asset. One of the most widely accepted formalisms for pricing contingent claims is the Black-Scholes formula, whose calculation relies on market data, the structure of payoffs at maturity (which are known) and the assumption that stock prices follow the model of geometric Brownian motion. The original model relies on stochastic calculus for a solution, but it is reducible to a simpler form known as put-call parity:
C(S,t) = SN(d ) – Ke–r(T – t )N(d) and P(S,t) = Ke-r(T – t ) – S + C(S,t)
Contingent claim pricing theory provides an alternative foundation to credit ratings for credit risk evaluation. The term “contingent claim” refers to options: financial assets that confer the right but not the obligation to buy or sell an asset. One of the most widely accepted formalisms for pricing contingent claims is the Black-Scholes formula, whose calculation relies on market data, the structure of payoffs at maturity (which are known) and the assumption that stock prices follow the model of geometric Brownian motion. The original model relies on stochastic calculus for a solution, but it is reducible to a simpler form known as put-call parity:
C(S,t) = SN(d ) – Ke–r(T – t )N(d) and P(S,t) = Ke-r(T – t ) – S + C(S,t)
Since 2004, Basel II has been revised or enhanced several times. Its September 2010 update, known as Basel III. Which among the following are the fundamentals of Basel III?
I. Creating incentives to bring over-the-counter (“OTC”) derivative trading into exchanges.
II. Imposing short- and medium-term liquidity ratios alongside credit targets.
III. Focus on raising capital quality.
IV. Introducing a standard leverage ratio.
Since 2004, Basel II has been revised or enhanced several times. Its September 2010 update, known as Basel III, focuses on raising capital quality, introducing a standard leverage ratio, addressing counterparty credit risk, promoting forward-looking provisioning, creating incentives to bring over-the-counter (“OTC”) derivative trading into exchanges, and imposing short- and medium-term liquidity ratios alongside credit targets. The current draft does not change the de facto role of CRAs as providers of credit risk measures.
Since 2004, Basel II has been revised or enhanced several times. Its September 2010 update, known as Basel III, focuses on raising capital quality, introducing a standard leverage ratio, addressing counterparty credit risk, promoting forward-looking provisioning, creating incentives to bring over-the-counter (“OTC”) derivative trading into exchanges, and imposing short- and medium-term liquidity ratios alongside credit targets. The current draft does not change the de facto role of CRAs as providers of credit risk measures.
Contrary to any impression candidates may derive from this manual, there is no such thing as a generic approach to analysing or rating credit. Each CRA has its own corporate culture, through which it imposes standards and enforces cultural values on its employees including rating analysts.Which among the following are the major part of the job of a credit rating analyst(CRA)?
I. Read a term sheet
II. Handling a rating appeal
III. Write a committee memo
IV. Deciding the rating committee members to select
Contrary to any impression candidates may derive from this manual, there is no such thing as a generic approach to analysing or rating credit. Each CRA has its own corporate culture, through which it imposes standards and enforces cultural values on its employees including rating analysts. Moreover, the research requirements vary with the type of credit. Nevertheless, there are enough common elements in the rating committee research and analysis process to make it possible to speak broadly about what rating agency analysts do.
Read a term sheet
Write a committee memo
Credit committee
Dissemination
Handling a rating appeal
Monitoring and updating the rating
Taking a rating action
Contrary to any impression candidates may derive from this manual, there is no such thing as a generic approach to analysing or rating credit. Each CRA has its own corporate culture, through which it imposes standards and enforces cultural values on its employees including rating analysts. Moreover, the research requirements vary with the type of credit. Nevertheless, there are enough common elements in the rating committee research and analysis process to make it possible to speak broadly about what rating agency analysts do.
Read a term sheet
Write a committee memo
Credit committee
Dissemination
Handling a rating appeal
Monitoring and updating the rating
Taking a rating action
The CRA Code stipulates that rating results or revisions should be disclosed in a timely fashion with an explanation of the key elements underlying the rating. As a matter of relationship necessity, the lead analyst tends to disclose the rating outcome to the arranger/issuer contact shortly after the committee disbands.
Exactly who is contacted first depends on the type of rating. Which among the following is contacted in case of a structured transaction?
I. CRA analyst
II. the ratings adviser
III. representative of the borrower’s financial department
IV. the lead analyst on the financial advisory team
The CRA Code stipulates that rating results or revisions should be disclosed in a timely fashion with an explanation of the key elements underlying the rating.
As a matter of relationship necessity, the lead analyst tends to disclose the rating outcome to the arranger/issuer contact shortly after the committee disbands.
Exactly who is contacted first depends on the type of rating. For an institutional (corporate, sovereign, municipal) rating, it is most likely to be a representative of the borrower’s financial department. If an investment bank is involved in ratings advisory work, the ratings adviser will also be informed. For a structured transaction, the lead analyst on the financial advisory team will be most likely to receive the news.
When the outcome matches expectations, the remaining steps to closing the transaction proceed rapidly. The rating letter is produced, and a press release is drafted and issued to the market. Final ratings will appear on the cover page of the next and final set of bond documents, and will also be posted on the CRA and possibly other financial websites.
But the rating outcome is not always as expected by the arranger/issuer and its representative. Then the lead analyst must prepare to deal with challenges, not only to the outcome but also to the process.
The CRA Code stipulates that rating results or revisions should be disclosed in a timely fashion with an explanation of the key elements underlying the rating.
As a matter of relationship necessity, the lead analyst tends to disclose the rating outcome to the arranger/issuer contact shortly after the committee disbands.
Exactly who is contacted first depends on the type of rating. For an institutional (corporate, sovereign, municipal) rating, it is most likely to be a representative of the borrower’s financial department. If an investment bank is involved in ratings advisory work, the ratings adviser will also be informed. For a structured transaction, the lead analyst on the financial advisory team will be most likely to receive the news.
When the outcome matches expectations, the remaining steps to closing the transaction proceed rapidly. The rating letter is produced, and a press release is drafted and issued to the market. Final ratings will appear on the cover page of the next and final set of bond documents, and will also be posted on the CRA and possibly other financial websites.
But the rating outcome is not always as expected by the arranger/issuer and its representative. Then the lead analyst must prepare to deal with challenges, not only to the outcome but also to the process.
The CRA Code dictates monitoring and timely updating but does not impose specific rules on when or how to initiate the rating action. Which among the following are a part of the rating action?
I. The CRA analyst never unilaterally undertakes a rating upgrade or downgrade – a rating committee will take that decision.
II. If the request for an appeal is not based on new information, it is likely to be the result of pressure rather than facts, and should be rejected.
III. The CRA Code implicitly reflects current CRA best practice when it sets standards on rating team diversity and restricts the representative’s scope of actions to its defined duties.
IV. A press release is drafted and issued to the market.
The CRA Code dictates monitoring and timely updating but does not impose specific rules on when or how to initiate the rating action. In practice, the lead CRA analyst may identify a need to review the facts and circumstances. Alternatively, the initiative may come from the outside. Whatever the source of the request, the CRA has a responsibility to undertake the type of reviews to which it commits, even if the process results in a confirmation of the original rating.
When it comes to carrying out the rating action, the CRA Code implicitly reflects current CRA best practice when it sets standards on rating team diversity and restricts the representative’s scope of actions to its defined duties. The CRA analyst never unilaterally undertakes a rating upgrade or downgrade – a rating committee will take that decision. As quickly as possible thereafter, a press release is drafted and issued to the market.
The CRA Code dictates monitoring and timely updating but does not impose specific rules on when or how to initiate the rating action. In practice, the lead CRA analyst may identify a need to review the facts and circumstances. Alternatively, the initiative may come from the outside. Whatever the source of the request, the CRA has a responsibility to undertake the type of reviews to which it commits, even if the process results in a confirmation of the original rating.
When it comes to carrying out the rating action, the CRA Code implicitly reflects current CRA best practice when it sets standards on rating team diversity and restricts the representative’s scope of actions to its defined duties. The CRA analyst never unilaterally undertakes a rating upgrade or downgrade – a rating committee will take that decision. As quickly as possible thereafter, a press release is drafted and issued to the market.
With respect to divisional oversight, Which among the following is required by CRA code?
I. rescind the staffing of an ombudsman position
II. aggregation of rating, review and compliance functions
III. mandates the staffing of an ombudsman position
IV. separation of rating, review and compliance functions
With respect to divisional oversight, the CRA Code requires separation of rating, review and compliance functions, and mandates the staffing of an ombudsman position. Beyond this, the emphasis of the CRA Code is on end results, which places appropriate weight on oversight effectiveness but otherwise leaves the internal structure of governance to the design of the CRA.
With respect to divisional oversight, the CRA Code requires separation of rating, review and compliance functions, and mandates the staffing of an ombudsman position. Beyond this, the emphasis of the CRA Code is on end results, which places appropriate weight on oversight effectiveness but otherwise leaves the internal structure of governance to the design of the CRA.
Globally, CRAs are required to maintain accurate records of the methods they use in determining their ratings, as well as a record of upgrades, downgrades, withdrawals and watch-listings. What is the minimum required record-keeping time that the SFC requires from CRAs in Hong Kong?
I. 7 years
II. 3 years
III. 5 years
IV. 9 years
Globally, CRAs are required to maintain accurate records of the methods they use in determining their ratings, as well as a record of upgrades, downgrades, withdrawals and watch-listings. They must also keep a record of third party complaints received by analysts employed by them concerning their performance in initiating, deciding, altering or withdrawing a credit rating.
Additional disclosures have been required by various regimes in subsequent amendments to CRA regulatory frameworks. For example, in Hong Kong, the SFC requires the CRA to establish and implement review at least annually of its methodologies and internal control mechanisms, including certain details that facilitate an arm’s-length judgement about the fairness of the CRA’s ratings: how it keeps records, what source materials it uses in the rating, how it conducts due diligence on structured finance products, who the rating analyst is, how analysts are rotated, and whether the published rating has changed after disclosing it to the rated entity. The required record-keeping time is a minimum of 7 years.
Globally, CRAs are required to maintain accurate records of the methods they use in determining their ratings, as well as a record of upgrades, downgrades, withdrawals and watch-listings. They must also keep a record of third party complaints received by analysts employed by them concerning their performance in initiating, deciding, altering or withdrawing a credit rating.
Additional disclosures have been required by various regimes in subsequent amendments to CRA regulatory frameworks. For example, in Hong Kong, the SFC requires the CRA to establish and implement review at least annually of its methodologies and internal control mechanisms, including certain details that facilitate an arm’s-length judgement about the fairness of the CRA’s ratings: how it keeps records, what source materials it uses in the rating, how it conducts due diligence on structured finance products, who the rating analyst is, how analysts are rotated, and whether the published rating has changed after disclosing it to the rated entity. The required record-keeping time is a minimum of 7 years.
The CRA representative needs to be aware at all times that every communication by a CRA representative potentially affects the views of other parties on security value. Moreover, in the natural course of conducting rating business there are potentially many channels of communication . Which among the following are such channels of communication?
I. print and broadcast media
II. onsite due diligence reviews
III. transactional meetings and telephone conversations
IV. organized events and gathering
The CRA representative needs to be aware at all times that every communication by a CRA representative potentially affects the views of other parties on security value. Moreover, in the natural course of conducting rating business there are potentially many channels of communication including website, print and broadcast media, organized events and gatherings, onsite due diligence reviews, transactional meetings and telephone conversations. On the one hand, multi-modal communication creates many options for a CRA to disseminate information and get its messages across to the public. But, on the other hand, the CRA and its representatives must remain conscious of their public responsibility to avoid inappropriate or misleading communications.
The CRA representative needs to be aware at all times that every communication by a CRA representative potentially affects the views of other parties on security value. Moreover, in the natural course of conducting rating business there are potentially many channels of communication including website, print and broadcast media, organized events and gatherings, onsite due diligence reviews, transactional meetings and telephone conversations. On the one hand, multi-modal communication creates many options for a CRA to disseminate information and get its messages across to the public. But, on the other hand, the CRA and its representatives must remain conscious of their public responsibility to avoid inappropriate or misleading communications.
A snapshot of the company’s resources and claims (from left to right) is provided by the balance sheet. A good place to launch an investigation of company credit capacity is by testing the health of different operating subsystems inside the balance sheet.
First, can the company self-finance through internal working capital, or do mismatches in the timing of assets and liabilities generate the need for external borrowings? The variable that addresses this question is working capital requirements. Which among the following are the major factors that are used to calculate Working Capital Requirements?
I. Excess stocks
II. Inventory
III. Accounts payable
IV. Accounts receivable
a snapshot of the company’s resources and claims (from left to right) is provided by the balance sheet. A good place to launch an investigation of company credit capacity is by testing the health of different operating subsystems inside the balance sheet.
First, can the company self-finance through internal working capital, or do mismatches in the timing of assets and liabilities generate the need for external borrowings? The variable that addresses this question is working capital requirements.
Working capital requirements = accounts receivable + inventory – accounts payable.
a snapshot of the company’s resources and claims (from left to right) is provided by the balance sheet. A good place to launch an investigation of company credit capacity is by testing the health of different operating subsystems inside the balance sheet.
First, can the company self-finance through internal working capital, or do mismatches in the timing of assets and liabilities generate the need for external borrowings? The variable that addresses this question is working capital requirements.
Working capital requirements = accounts receivable + inventory – accounts payable.
Which among the following defines and describes Asset turnover?
I. It allows the analyst to compare the firm’s efficiency in converting its physical capital to liquid capital to other firms.
II. It is a measure that allows the analyst to compare the firm’s efficiency in converting its physical capital to liquid capital to other firms.
III. It forms the activity component of the DuPont model.
IV. It is a cash flow measure that also indicates balance sheet strength.
Asset turnover is a measure that allows the analyst to compare the firm’s efficiency in converting its physical capital to liquid capital to other firms. Although this ratio is seldom used on a stand-alone basis in modern credit analysis, it forms the activity component of the DuPont model.
Asset turnover is a measure that allows the analyst to compare the firm’s efficiency in converting its physical capital to liquid capital to other firms. Although this ratio is seldom used on a stand-alone basis in modern credit analysis, it forms the activity component of the DuPont model.
One of the most common ratios of liquidity analysis is quick ratio. Which among the following is true for quick ratio?
I. It is calculated from CFFO.
II. It enables the analyst to compare the liquidity position of the firm with that of its peers.
III. It excludes potentially non-liquid current assets.
IV. It grosses up the numerator with raw materials, inventory and other forms of current capital that may not be convertible to cash in an adverse economy.
Liquidity is a measure of cash in hand (or cash that can be raised within a short time frame) to repay current liabilities as they come due. Common ratios of liquidity analysis, in order of acceptance, are:
1. Quick ratio
2. Current ratio
The quick ratio enables the analyst to compare the liquidity position of the firm with that of its peers. It excludes potentially non-liquid current assets. The current ratio grosses up the numerator with raw materials, inventory and other forms of current capital that may not be convertible to cash in an adverse economy.
Liquidity is a measure of cash in hand (or cash that can be raised within a short time frame) to repay current liabilities as they come due. Common ratios of liquidity analysis, in order of acceptance, are:
1. Quick ratio
2. Current ratio
The quick ratio enables the analyst to compare the liquidity position of the firm with that of its peers. It excludes potentially non-liquid current assets. The current ratio grosses up the numerator with raw materials, inventory and other forms of current capital that may not be convertible to cash in an adverse economy.
Many types of covenant are possible. Some are straightforward and intuitive, such as minimum interest coverage ratios, others more complex. Which among the following is true for The change of control covenant?
I. It protect the investor with interest rate changes based on leverage ratios or ratings changes.
II. It allows the investor to exit from or modify the borrowing arrangement if the issuer changes ownership.
III. It limits the amount of future debt the issuer can raise, especially debt senior to the bond in question.
IV. It would restrict voting eligibility based on the series of notes rather than the entire indenture, when the series is of sufficient size
The change of control covenant allows the investor to exit from or modify the borrowing arrangement if the issuer changes ownership. This should capture all functional equivalents of change-of-control situations, including stock-for-merger and sale of “all or substantially all” the issuer’s assets. When the covenant is conditional on both a rating downgrade and a change of control, the two events should not be linked.
The change of control covenant allows the investor to exit from or modify the borrowing arrangement if the issuer changes ownership. This should capture all functional equivalents of change-of-control situations, including stock-for-merger and sale of “all or substantially all” the issuer’s assets. When the covenant is conditional on both a rating downgrade and a change of control, the two events should not be linked.
Project finance is usually carried out off-balance sheet. Which among the following is true regarding project finance in companies?
I. Credit is the preferred form of investment.
II. The main liquid asset are bonds.
III. The capital asset is the product of the company generating the cash.
IV. Operating expenses, taxes and the debt borrowed are the main assets to build the infrastructure in the capital construction period.
Project finance is usually carried out off-balance sheet because the scale of investment is too great for any one company to undertake.
Project debt is typically analysed as a reduced-form company. The main liquid asset is cash, generated by tolls or commodity sales. The capital asset is the physical infrastructure generating the cash, which is to be built with investment money. Debt is the preferred form of investment because it is cheaper but, since project debt is inherently risky, it is not unusual to have more than one tranche of debt, and sometimes equity, in the capital structure. Other than operating expenses and taxes, the main liability is the debt borrowed to build the infrastructure in the capital construction period and the continuing obligation to repay the debt after project completion.
Project finance is usually carried out off-balance sheet because the scale of investment is too great for any one company to undertake.
Project debt is typically analysed as a reduced-form company. The main liquid asset is cash, generated by tolls or commodity sales. The capital asset is the physical infrastructure generating the cash, which is to be built with investment money. Debt is the preferred form of investment because it is cheaper but, since project debt is inherently risky, it is not unusual to have more than one tranche of debt, and sometimes equity, in the capital structure. Other than operating expenses and taxes, the main liability is the debt borrowed to build the infrastructure in the capital construction period and the continuing obligation to repay the debt after project completion.
Structured finance transactions and securitizations share their terminology. Which among the following can be interchangeably used for Liabilities?
I. Securities
II. Tranches
III. Liability structure
IV. Waterfall
Structured finance transactions and securitizations share a special terminology to describe the transaction parts and relationships:
1. Assets and collateral are used interchangeably.
2. Liabilities, tranches (or levels in the liability structure) and securities are mostly interchangeable.
3. Liability structure, capital structure and waterfall are used interchangeably.
Structured finance transactions and securitizations share a special terminology to describe the transaction parts and relationships:
1. Assets and collateral are used interchangeably.
2. Liabilities, tranches (or levels in the liability structure) and securities are mostly interchangeable.
3. Liability structure, capital structure and waterfall are used interchangeably.
Forecasts of default risk on structured transactions are referred to as the expected loss (“EL”). Which among the following is true for EL?
I. An EL is the product of a default rate and a recovery rate on the collateral.
II. The EL on a revolving portfolio basis is systematically higher than it is on a static pool.
III. The EL on a static pool basis is systematically higher than it is on a collateral pool that is revolving.
IV. The cumulative loss of principal (percentage of the initial balance) forecast from the loss experience of pools of similar underwriting criteria.
Forecasts of default risk on structured transactions are referred to as the expected loss (“EL”), meaning the cumulative loss of principal (percentage of the initial balance) forecast from the loss experience of pools of similar underwriting criteria. For example: the last four transactions of a seller lost, cumulatively, 3.5%, 3.2%, 2.95% and 3.1% of their initial principal amount. Reviewing this history and assuming the same underwriting criteria, a reasonable EL forecast on the static pool of the next deal would be 3.25%, although the average is closer to 3.2%.
An EL is the product of a default rate and a recovery rate on the collateral.
The EL on a static pool basis is systematically higher than it is on a collateral pool that is revolving, i.e. with new collateral coming in and old collateral amortizing.
Forecasts of default risk on structured transactions are referred to as the expected loss (“EL”), meaning the cumulative loss of principal (percentage of the initial balance) forecast from the loss experience of pools of similar underwriting criteria. For example: the last four transactions of a seller lost, cumulatively, 3.5%, 3.2%, 2.95% and 3.1% of their initial principal amount. Reviewing this history and assuming the same underwriting criteria, a reasonable EL forecast on the static pool of the next deal would be 3.25%, although the average is closer to 3.2%.
An EL is the product of a default rate and a recovery rate on the collateral.
The EL on a static pool basis is systematically higher than it is on a collateral pool that is revolving, i.e. with new collateral coming in and old collateral amortizing.
Which among the following is correct for data risk?
I. A failure to conceptualize the risk of the transaction.
II. The risk that historical performance data misleading.
III. It is now the explicit responsibility of the CRA to disclose its judgement about the validity of the data.
IV. A failure to reflect an important dimension of risk or value.
Concept risk relates to a failure to conceptualize the risk of the transaction and incorporate this conceptualization into the design and use the risk analytical process. Examples of concept risk in structured finance might be biases in the model that lead to adverse selection of which the CRA analyst and many market users are unaware, or of which they become aware when the performance of structured securities deviates dramatically from what the ratings would predict.
Concept risk relates to a failure to conceptualize the risk of the transaction and incorporate this conceptualization into the design and use the risk analytical process. Examples of concept risk in structured finance might be biases in the model that lead to adverse selection of which the CRA analyst and many market users are unaware, or of which they become aware when the performance of structured securities deviates dramatically from what the ratings would predict.
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