AT THE BEGINNING OF THE YEAR, A FIRM BOUGHT AN AA-RATED CORPORATE...
11.
At the beginning of the year, a firm bought an AA-rated corporate bond at USD 110 per USD 100 face value.
Using market data, the risk manager estimates the following year-end values for the bond based on interest
rate simulations informed by the economics team:
Rating
Year-end Bond Value
(USD per USD 100 face value)
AAA
112
AA
109
A
105
BBB
101
BB
92
B
83
CCC
73
Default
50
In addition, the risk manager estimates the 1-year transition probabilities on the AA-rated corporate bond:
Rating
Probability of State
AAA
3.00%
AA
85.00%
A
7.00%
BBB
4.00%
BB
0.35%
B
0.25%
CCC
0.15%
Default
0.25%
What is the 1-year 95% credit VaR per USD 100 of face value closest to?
a.
USD 9
b.
USD 18
c.
USD 30
d.
USD 36
50
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2015 Financial Risk Manager (FRM®) Practice Exam