1.
Risk management is about
I.Understanding and mitigating risk
II.Avoiding risk
III.Taking risks
IV.None of the above
2. ABC Ltd. has (in Rs million) Total Assets of 2000, Working Capital of 546, EBIT of 540, Net
sales of 800, retained earnings of 630 and a market value of equity equal to 350. The Altman Z –
Score is calculated based on the equation
ZPublic = 1.2X1 + 1.4X2 + 3.3 X3 + 0.6 X4 + 1.0X5
Where,
X1 = Working Capital / Total Assets
X2 = Retained Earning / Total Assets
X3 = EBIT / Total Assets
X4 = Market Value of Equity / Total Assets
X5 = Net Sales / Total Assets
What is the Altman Z – score for ABC Ltd.?
a. 2.5688
b. 2.1646
c. 2.50
d. 2.023
3. Based on the information in the table, what is the efficiency of the prediction?
Predicted Ratings
AAA AA A BBB
AAA 7 10
Actual AA 52 17
Ratings A 11 85 3
BBB 1 25 16
a. 77%
b. 71%
c. 70%
d. 70.5%
4. A CDO consisting of 3 tranches has an underlying portfolio of n corporate bonds with a total
principal of Euro N million. Tranche 1 has 10% of N and absorbs the first 10% of default losses.
Tranche 2 has 20% of N and absorbs the next 20% of default losses. The final Tranche 3 has 70%
of N and absorbs the residual default loss. Which of the followings statements is true?
I. Trance 2 has the highest yield
II. Tranche 1 is usually called “toxic waste”
III. Tranche 3 would typically be rates AAA by a credit rating agency
IV. Tranche 3 has the lowest yield
a. I only
b. IV only
c. II, III and IV only
d. II and IV only
5. The Altman’s Z Score Model (1968) specifies z
as ZPublic = 1.2X1 + 1.4X2 + 3.3 X3 + 0.6 X4 + 1.0X5. If the company were to be healthy, which of
the following values of ZPublic would be true?
I. ZPublic > 2.99
II. ZPublic < 2.99
III. ZPublic = 2.99
IV. None of the above
6. Bank One has made a $200 million loan to a software company at a fixed rate of 12%. The
bank wants to hedge its exposure by entering into a total return swap with a counterparty,
Interloan Co., in which Bank One promises to pay the interest on the loan plus the change in
the market value of the loan in exchange for LIBOR plus 40 basis points. If after one year the
market value of the loan has decreased by 3% and LIBOR is 11%, what will be the net
obligation of Bank One?
a. Net receipt of $4.8 million
b. Net payment of $4.8 million
c. Net receipt of $5.2 million
d. Net payment of $5.2 million
7. Consider the following homogenous reference portfolio in a synthetic CDO:
Number of reference entities: 100
CDS Spread, s: 150 bps
Recovery rate, f: 50%
Assume all defaults are independent of each other. On a single name, the annual default probability
(PD) is constant over 5 years and obeys the relationship “s=(1- f)PD”. What is the expected number
of defaulting entities over the next five years?
a. There would likely be no defaults
b. There would likely be 3 defaults
c. There would likely be 7 defaults
d. None of the above
8. Company A and Company B enter into a trade agreement in which Company A will periodically
pay all cash flows and capital gains arising from Bond X to Company B. On the same dates
Company B will pay Company A LIBOR + 50bp plus any decrease in the market value of Bond
X. What type of trade is this?
a. A total return swap
b. A fixed-income-linked swap
c. An inverse floater
d. An interest-rate swap
