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PRMIA Exam 8010 Topic 1 Question 33 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 33
Topic #: 1

[All 8010 Questions]

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?

A0%

B100%

C40%

D25%

Show Suggested Answer

Suggested Answer: D

The change in the price of a security that follows a Weiner process is determined by its standard deviation and expected return. To get the price itself, we need to add this change in price to the current price. Therefore the future price in a Weiner process is determined by all three of current price, expected return and standard deviation.

by Freeman at Aug 10, 2023, 02:14 AM

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Jerilyn

1 months ago

Ah, the classic 'default correlation' question. I bet the answer is going to be a bit counterintuitive.

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Candida

1 months ago

Wait, what's the probability of two bonds defaulting simultaneously? That seems like a key piece of information here.

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Caprice

5 days ago

A) 0%

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Dominga

1 months ago

Alright, time to put on my thinking cap. This might require a bit of creative problem-solving.

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Ashleigh

18 days ago

C) 40%

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Celestina

22 days ago

B) 100%

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Mona

1 months ago

A) 0%

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Sherrell

1 months ago

I feel like I've seen a question like this before. Time to put my finance knowledge to the test!

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Hildegarde

1 months ago

Hmm, the default probabilities and the joint default probability are given, so I should be able to work this out. Let me think it through step-by-step.

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Vallie

2 months ago

This looks like a tricky one. I'll need to brush up on my probability and correlation calculations to tackle this.

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Eura

3 days ago

D) 25%

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Kerry

5 days ago

C) 40%

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Ruthann

1 months ago

B) 100%

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Abel

1 months ago

A) 0%

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Kanisha

2 months ago

But if the probability of default of the two bonds are 0.03 and 0.08, then the default correlation should be 40% according to the formula.

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Sommer

2 months ago

I disagree, I believe the default correlation is 25%.

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Kanisha

2 months ago

I think the default correlation between the two bonds is 40%.

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a