RSK4804
Assignment 1 2025
Unique #:865733
Due Date: 30 May 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
a.
The two most important drivers of credit risk are:
1. Creditworthiness of the Borrower
This refers to the borrower’s ability and willingness to meet debt obligations
based on their financial health. Key indicators include credit history, income, cash
flow, and existing debt levels. A weaker financial profile increases the likelihood of
missed payments, thereby increasing the Probability of Default (PD).
2. Macroeconomic and Market Conditions
Broader economic factors like interest rates, inflation, GDP growth, and industry-
specific trends impact the borrower’s ability to repay. For instance, a recession
may increase PD across many borrowers due to reduced income and profitability.
Thus, external conditions can significantly elevate PD even for previously reliable
borrowers.
Together, these drivers influence risk assessments by quantifying how likely it is
that a borrower will fail to meet their obligations, which is the core of credit risk
evaluation.
b.
CPD = 1 – (1 – PD₁) × (1 – PD₂) × (1 – PD₃) × (1 – PD₄) × (1 – PD₅)
CPD = 1 – (1 – 0.013) × (1 – 0.015) × (1 – 0.012) × (1 – 0.017) × (1 – 0.022)
= 1 – (0.987 × 0.985 × 0.988 × 0.983 × 0.978)
= 1 – (0.92555)
= 0.07445
Therefore, the cumulative probability of default over the five-year term is
approximately 7.45%.
QUESTION 2
Varsity Cube 2025 +27 81 278 3372
Assignment 1 2025
Unique #:865733
Due Date: 30 May 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
a.
The two most important drivers of credit risk are:
1. Creditworthiness of the Borrower
This refers to the borrower’s ability and willingness to meet debt obligations
based on their financial health. Key indicators include credit history, income, cash
flow, and existing debt levels. A weaker financial profile increases the likelihood of
missed payments, thereby increasing the Probability of Default (PD).
2. Macroeconomic and Market Conditions
Broader economic factors like interest rates, inflation, GDP growth, and industry-
specific trends impact the borrower’s ability to repay. For instance, a recession
may increase PD across many borrowers due to reduced income and profitability.
Thus, external conditions can significantly elevate PD even for previously reliable
borrowers.
Together, these drivers influence risk assessments by quantifying how likely it is
that a borrower will fail to meet their obligations, which is the core of credit risk
evaluation.
b.
CPD = 1 – (1 – PD₁) × (1 – PD₂) × (1 – PD₃) × (1 – PD₄) × (1 – PD₅)
CPD = 1 – (1 – 0.013) × (1 – 0.015) × (1 – 0.012) × (1 – 0.017) × (1 – 0.022)
= 1 – (0.987 × 0.985 × 0.988 × 0.983 × 0.978)
= 1 – (0.92555)
= 0.07445
Therefore, the cumulative probability of default over the five-year term is
approximately 7.45%.
QUESTION 2
Varsity Cube 2025 +27 81 278 3372
