- CFA Exams
- CFA Level I Exam
- Study Session 13. Fixed Income (2)
- Reading 35. Credit Analysis Models
- Subject 3. Structural and reduced form credit models
CFA Practice Question
Which statement is FALSE according to reduced-form models?
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.
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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