GARP Updated 2016-FRR Exam Questions and Answers by madina

Model Definition:Historical frequency models are used to assign an obligor to a class based on risk characteristics at the time of loan origination and estimate default probability based on the past default rates of that class.

Application:These models use historical data to determine the probability of default by analyzing past defaults within the same risk class, providing a statistical basis for risk assessment.

In the United States, the largest component of securitized debt is represented by real estate loans. Securitization involves pooling various types of debt instruments, including mortgages, auto loans, credit card debt, and others, and selling them as bonds to investors. The largest portion of this market is dominated by mortgage-backed securities (MBS), which are based on real estate loans. These securities were especially prominent leading up to the 2008 financial crisis and continue to represent a significant share of the securitization market.

When a country reduces its budget deficits and lowers its dependence on debt, it generally strengthens its fiscal position. This can lead to increased investor confidence and higher demand for the country’s currency. In Japan's case, if it reduces its budget deficits and its dependence on debt, the Japanese yen (JPY) would likely appreciate in value against other currencies. This appreciation occurs because a stronger fiscal position reduces the risk of inflation and debt defaults, making the currency more attractive to investors.

The potential failure of a manufacturer to honor a warranty is a type of performance risk because it relates to the manufacturer's performance under the terms of the warranty contract. Conversely, the potential failure of a borrower to fulfill its payment requirements, including both the repayment of the amount borrowed (principal) and the contractual interest payments, is known as credit risk. Credit risk specifically deals with the likelihood of a borrower defaulting on their debt obligations.