,RSK4804 Assignment 1 (COMPLETE ANSWERS) Semester
1 2025 - DUE 30 May 2025; ;100% trusted ,comprehensive
and complete reliable solution with clear explanation
QUESTION 1
a. Explain the two most important drivers of credit risk and how
those relate to the probability of default (PD). (5)
b. As head of credit risk at Daspoort Investment Bank, you are
considering approval of a five-year credit asset (business term
loan) with a bullet (balloon) repayment at the end of a term. The
term loan shows a marginal probability of default of 1.3%,
1.5%, 1.2%, 1.7%, and 2.2% for each of the five years,
respectively. How would you find the cumulative probability of
default over the five-year period for pricing purposes? (5)
QUESTION 1
a. Explain the two most important drivers of credit risk and
how those relate to the probability of default (PD). (5)
The two most important drivers of credit risk are:
1. Creditworthiness of the Borrower:
The creditworthiness of the borrower is one of the most
significant factors in determining credit risk. It includes an
assessment of the borrower's financial health, past credit
, history, current financial obligations, and capacity to repay
the loan. Borrowers with strong financial positions and a
good track record of repaying debts have a lower
probability of default (PD). In contrast, borrowers with
weak financial conditions or a history of missed payments
are considered higher risk, thus increasing their PD.
2. Macroeconomic Factors:
The broader economic environment also plays a critical
role in credit risk. Economic conditions such as inflation,
interest rates, unemployment rates, and GDP growth can
influence the likelihood of a borrower defaulting. For
instance, during a recession or economic downturn,
businesses and individuals may struggle to meet their
financial obligations, leading to higher PDs. In contrast, in
a stable or growing economy, the chances of repayment are
generally higher, leading to lower PDs.
Relation to Probability of Default (PD):
If the borrower's creditworthiness is strong, the PD will be
lower.
If the borrower's creditworthiness is weak, the PD will be
higher.
Adverse macroeconomic conditions can increase the PD by
affecting the borrower's ability to repay, whereas favorable
conditions can reduce the PD.
b. As head of credit risk at Daspoort Investment Bank, you
are considering approval of a five-year credit asset (business
term loan) with a bullet (balloon) repayment at the end of a
1 2025 - DUE 30 May 2025; ;100% trusted ,comprehensive
and complete reliable solution with clear explanation
QUESTION 1
a. Explain the two most important drivers of credit risk and how
those relate to the probability of default (PD). (5)
b. As head of credit risk at Daspoort Investment Bank, you are
considering approval of a five-year credit asset (business term
loan) with a bullet (balloon) repayment at the end of a term. The
term loan shows a marginal probability of default of 1.3%,
1.5%, 1.2%, 1.7%, and 2.2% for each of the five years,
respectively. How would you find the cumulative probability of
default over the five-year period for pricing purposes? (5)
QUESTION 1
a. Explain the two most important drivers of credit risk and
how those relate to the probability of default (PD). (5)
The two most important drivers of credit risk are:
1. Creditworthiness of the Borrower:
The creditworthiness of the borrower is one of the most
significant factors in determining credit risk. It includes an
assessment of the borrower's financial health, past credit
, history, current financial obligations, and capacity to repay
the loan. Borrowers with strong financial positions and a
good track record of repaying debts have a lower
probability of default (PD). In contrast, borrowers with
weak financial conditions or a history of missed payments
are considered higher risk, thus increasing their PD.
2. Macroeconomic Factors:
The broader economic environment also plays a critical
role in credit risk. Economic conditions such as inflation,
interest rates, unemployment rates, and GDP growth can
influence the likelihood of a borrower defaulting. For
instance, during a recession or economic downturn,
businesses and individuals may struggle to meet their
financial obligations, leading to higher PDs. In contrast, in
a stable or growing economy, the chances of repayment are
generally higher, leading to lower PDs.
Relation to Probability of Default (PD):
If the borrower's creditworthiness is strong, the PD will be
lower.
If the borrower's creditworthiness is weak, the PD will be
higher.
Adverse macroeconomic conditions can increase the PD by
affecting the borrower's ability to repay, whereas favorable
conditions can reduce the PD.
b. As head of credit risk at Daspoort Investment Bank, you
are considering approval of a five-year credit asset (business
term loan) with a bullet (balloon) repayment at the end of a
