QUESTION 1: You are the newly appointed Credit Risk Analyst at Banking Corp. Australia. Your task is to evaluate the credit risk of SIA, a commercial obligor, using the Merton/KMV model. SIAs equity is valued at $10 million. Equity volatility is 40%. SIAs debt is $50 million and is expected to be paid in two years. The risk-free interest rate is 6% per annum. The distance to default is

a. 0.41%

b. $1.68 million

c. None of the other answers provided is correct.

d. 0.67%

e. $1.93 million

QUESTION 2: A LIBOR/swap curve is flat at 6.5%. The price of a five-year bond with coupon of 5% (paid Semi-annually) is $85. The bonds face value is $100. The asset swap spread is closest to

a. 3.51%

b. None of the other answers provided is correct.

c. 2.44%

d. 1.96%

e. 2.98%

QUESTION 4:

A bank has the following transactions with a corporation.

A nine-year interest rate swap with a notional principal of $250 million and a current market value of $2 million.

A four-year interest rate swap with a notional principal of $100 million and a current value of $3.5 million.

A six-month derivative on a commodity with a principal of $50 million that is currently worth $1 million.

Calculate the credit equivalent amount assuming that netting is applied.

a. None of the other answers provided is correct.

b. $10.04 million

c. $10.86 million

d. $6.87 million

e. $9.28 million