PRMIA 8010 Exam - Topic 1 Question 26 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 26
Topic #: 1

A zero coupon corporate bond maturing in an year has a probability of default of 5% and yields 12%. The recovery rate is zero. What is the risk free rate?

A5.26%

B7.00%

C5.00%

D6.40%

Show Suggested Answer

Suggested Answer: B

Extreme value theory focuses on the extreme and rare events, and in the case of VaR calculations, it is focused on the right tail of the loss distribution. In very simple and non-technical terms, EVT says the following:

1. Pull a number of large iid random samples from the population,

2. For each sample, find the maximum,

3. Then the distribution of these maximum values will follow a Generalized Extreme Value distribution.

(In some ways, it is parallel to the central limit theorem which says that the the mean of a large number of random samples pulled from any population follows a normal distribution, regardless of the distribution of the underlying population.)

Generalized Extreme Value (GEV) distributions have three parameters: (shape parameter), (location parameter) and (scale parameter). Based upon the value of , a GEV distribution may either be a Frechet, Weibull or a Gumbel. These are the only three types of extreme value distributions.

by Elly at Feb 26, 2023, 03:12 PM

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Aron

7 months ago

I disagree, I feel like it should be higher than that.

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Eleni

7 months ago

Wait, how can the recovery rate be zero? That seems off.

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Reita

7 months ago

Definitely going with option A, makes sense!

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Adelina

7 months ago

I think the risk-free rate is closer to 5.26%.

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Glory

7 months ago

The yield is 12% with a 5% default risk.

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Jacquelyne

8 months ago

I feel like I’ve seen similar questions before, but I’m confused about how the recovery rate impacts the yield. Does it even matter since it's zero?

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Amie

8 months ago

I think the risk-free rate is derived from the yield minus the default risk premium. I just hope I remember the right way to calculate it!

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Barrie

8 months ago

This question feels familiar! I think we might need to adjust the yield for the default risk, but I can't recall the exact formula we practiced.

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Gail

8 months ago

I remember something about using the yield and default probability to find the risk-free rate, but I'm not entirely sure how to set it up.

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Leslee

8 months ago

Hmm, I'm a little unsure about this one. I know we covered these concepts in class, but I'm having trouble remembering the differences between them.

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Royce

8 months ago

Hmm, this one has me a bit stumped. I know I need to find two widgets that cover both threat/security and device health, but I'm not 100% sure which ones to choose. I think Appliance Status and Intrusion Events might be the right answer, but I'll have to carefully consider the other options as well.

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