Fixed Income - Fixed Income Section 2
- Option : A
- Explanation : Bond price changes due to general interest rate movements are not considered credit risk.
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42. Which of the following industries is most likely to have the greatest risk?
- Option : A
- Explanation : The airline industry relies upon a few aircraft manufacturers; therefore the bargaining power of suppliers is great making this a risky industry. The beverage industry relying upon a huge customer base has a regular stream of cash flows and the negotiating power does not lie with the customers. Therefore this is less risky. The pharmaceutical industry having high entry barriers is less risky because the competition is not fierce and pricing power is significant.
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43. Expected loss is best calculated as:
- Option : A
- Explanation : Expected loss = Default probability * Loss severity.
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44. Which of the following is least likely to be a component of credit risk?
- Option : C
- Explanation : The two components of credit risk are default probability and loss severity.
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45. Which of the following statements is most accurate? The best measure of credit risk is:
- Option : A
- Explanation : Credit risk is best measured by the expected loss which is the product of probability of default and the severity of loss in the event of default. Neither component alone completely reflects the risk.
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