1.The marginal probability of default for years one and two is 0.5% and 1.1 %,respectively. Ifthe cumulative probability of default for the 3-year period is 4.45%, the marginal probability of default for year three is closest to:
　　A. 2.8%
　　B. 3.2%
　　C. 2.9%
　　D. 2.7%
　　2.The capital conservation buffer:
　　A. Will provide an extra 2.5% Common Equity Tier 1 capital buffer in times of stress.
　　B.will be used exclusively to protect banks from the losses garnered from OTC derivatives trading.
　　C. Is required only for banks with inadequate liquidity coverage and net stable funding source ratios.
　　D. Is covered in the increased Common Equity Tier 1 capital to risk-weighted assets ratio that wi1l increase to 4.5% from the current 2% over the next few years.
　　3.An analyst has gathered the following information about ABC Inc. a.'1d DEF Inc.The respective credit ratings are AA and BBB with l-year CDS spreads of200 and 300 basis points each. The associated probabilities of default based on published reports are 10% and 20%, respectively. Which ofthe following statements about the recovery rates is most likely correct?
　　A. The market implied recovery rates are equal.
　　B. The market implied recovery rates is higher for ABC.
　　C. The market implied recovery rates is lower for ABC.
　　D. The loss given default is higher for DEF.
　　Answer:
　　1.C
　　The cumulative probability of default is equal to one minus the probability of surviving to the end ofthe period without default:
　　C3 =1 一(1-Pl)(1 一P2 )(1 一P3)0.0445 = 1-(1-0.005)(1-0.01 ~)(1-P3)*P3 =2.9%
　　2.A
　　The capital conservation buffer is intended to provide an extra cushion against loss in times of
　　stress. It is 2.5% Common Equity Tier 1 capital to risk-wejghted assets, which in effect increasesthe total Common Equity Tier 1 capital ratio to 7%.
　　3.C
　　The approximation of credit spread = (1 - RR) X (PD). This implies:
　　ABC: 200 bps=(I-RR)X(10%), so RR= 80%.
　　DEF: 300 bps = (1 - RR) X (20%), so RR = 85%.
　　Thus, the market implied recovery rate is lower for ABC. Using loss given default terminology,
　　LGD for ABC = 20% and LGD for DEF = 15%.