Question #22 - Reading 28 Credit Analysis Models

Reading: Reading 28 Credit Analysis Models

PDF File: Reading 28 Credit Analysis Models.pdf

Page: 10

Status: Incorrect

Correct Answer: A

Your Answer: B

Shared Context

- Using the information in Exhibit 1, the expected exposure after one year is closest to: A) $1,146.98. B) $1,023.76. C) $1,066.98.

Question

Which of the assumptions stated by Scowen regarding the reduced form model is most accurate?

Answer Choices:

A. Assumption 3

B. Assumption 1

C. Assumption 2

Explanation

The assumptions of reduced form models include: The risk-free interest rate is stochastic. The state of the economy is stochastic and depends on macroeconomic variables. The probability of default (default intensity) and the recovery rate depend on the state of the economy and are not constant.

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