, RSK4804 Assignment 1 (COMPLETE ANSWERS)
Semester 1 2025 - DUE 30 May 2025; 100% correct solutions
and explanations.
Question 1
a. Explain the two most important drivers of credit risk and
how those relate to the probability of default (PD).
1. Borrower’s Credit Quality (Financial Health):
One of the most significant drivers of credit risk is the financial
strength and creditworthiness of the borrower. This includes
factors such as:
Income stability
Debt-to-income ratio
Liquidity
Leverage ratios
Credit history and score
A borrower with strong financials, consistent income, and low
existing debt is less likely to default, which corresponds to a
lower probability of default (PD). Conversely, weak financial
health increases the PD.
2. Macroeconomic and Market Conditions:
Economic conditions, both domestic and global, also heavily
influence credit risk. Key macroeconomic factors include:
Interest rates
Inflation
GDP growth
Unemployment rates
Semester 1 2025 - DUE 30 May 2025; 100% correct solutions
and explanations.
Question 1
a. Explain the two most important drivers of credit risk and
how those relate to the probability of default (PD).
1. Borrower’s Credit Quality (Financial Health):
One of the most significant drivers of credit risk is the financial
strength and creditworthiness of the borrower. This includes
factors such as:
Income stability
Debt-to-income ratio
Liquidity
Leverage ratios
Credit history and score
A borrower with strong financials, consistent income, and low
existing debt is less likely to default, which corresponds to a
lower probability of default (PD). Conversely, weak financial
health increases the PD.
2. Macroeconomic and Market Conditions:
Economic conditions, both domestic and global, also heavily
influence credit risk. Key macroeconomic factors include:
Interest rates
Inflation
GDP growth
Unemployment rates
