CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Which statement is FALSE according to reduced-form models?

A. If default occurs, different liabilities of a company's may have different loss rates.
B. The default probability is different for the company's different types of debt.
C. The risk premium is dominated by the time value of money when the PV of the expected loss is less than expected loss.
Correct Answer: B

The default probability is the same for all of the company's liabilities because of the existence of cross-default clauses in corporate debt. The loss rates can be different, however.

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