Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter24:CreditRiskMultipleChoiceTestBank:Questions1.Supposethatthecumulativeprobabilityofacompanydefaultingbyyearsone,two,threeandfourare3%,6.5%,10%,and14.5%,respectively.Whatistheprobabilityofdefaultinthefourthyearconditionalonnoearlierdefault?A.4.5%B.5.0%C.5.5%D.6.0%2.Whichofthefollowingisusuallyusedtodefinetherecoveryrateofabond?A.ThevalueofthebondimmediatelyafterdefaultasapercentofitsfacevalueB.Thevalueofthebondimmediatelyafterdefaultasapercentofthesumofthebond’sfacevalueandaccruedinterestC.TheamountfinallyrealizedbyabondholderasapercentoffacevalueD.Theamountfinallyrealizedbyabondholderasapercentofthesumofthebond’sfacevalueandaccruedinterest3.Whichofthefollowingistrue?A.RiskneutraldefaultprobabilitiesareusuallymuchlowerthanrealworlddefaultprobabilitiesB.RiskneutraldefaultprobabilitiesareusuallymuchhigherthanrealworlddefaultprobabilitiesC.RiskneutralandrealworldprobabilitiesmustbeclosetoeachotheriftherearetobenoarbitrageopportunitiesD.Risk-neutraldefaultprobabilitiescannotbecalculatedfromCDSspreads4.Ahazardrateis1%perannum.Whatistheprobabilityofadefaultduringthefirsttwoyears?A.2.00%B.2.02%C.1.98%D.1.96%5.WhichofthefollowingistrueA.ThedefaultprobabilityperyearforacompanyalwaysincreasesaswelookfurtheraheadB.ThedefaultprobabilityperyearforacompanyalwaysdecreasesaswelookfurtheraheadC.SometimesAistrueandsometimesBistrueD.Thedefaultprobabilityperyearisroughlyconstantformostcompanies6.WhichofthefollowingistrueA.ConditionaldefaultprobabilitiesareatleastashighasunconditionaldefaultprobabilitiesB.ConditionaldefaultprobabilitiesareatleastaslowasunconditionaldefaultprobabilitiesC.Conditionaldefaultprobabilitiesaresometimeslowerandsometimeshigherthanunconditionaldefaultprobabilities.D.Thereisnodifferencebetweenconditionalandunconditionaldefaultprobabilitiesbecauseacompanycanonlydefaultonce.7.Ifacompany’sfiveyearcreditspreadis200basispointsandtherecoveryrateintheeventofadefaultisestimatedtobe20%whatistheaveragehazard...
