Free GARP FRM Part II Credit Risk Practice Questions

Practice 86 free Credit Risk questions for GARP FRM Part II.

86 Questions

28 Easy

37 Medium

21 Hard

2026 Syllabus

Sample Questions

Question 1 Easy

Assume a corporate issuer has a constant hazard rate of default of 0.04 per year. What is the probability that the issuer survives the next three years?

Solution

D is correct. Under a constant hazard rate

\lambda

, the survival probability over horizon

t

S(t) = e^{-\lambda t}

. With

\lambda = 0.04

and

t = 3

S(3) = e^{-0.12} \approx 0.8869

Question 2 Medium

A counterparty's default time follows a constant hazard rate

\lambda = 0.05

per year. What is the unconditional probability that the counterparty defaults within the next four years?

Solution

B is correct. Under a constant hazard rate, survival to time

t

S(t) = e^{-\lambda t}

. The cumulative default probability over four years is

1 - S(4) = 1 - e^{-\lambda t} = 1 - e^{-0.05 \times 4} = 1 - e^{-0.20} = 1 - 0.8187 = 0.1813

, or 18.13%.

Question 3 Hard

Two corporate obligors A and B each have a one-year unconditional default probability of 5%. The default correlation between them is 0.30. Treating each default as a Bernoulli indicator, what is the probability that both A and B default within one year?

Solution

B is correct. Default correlation is the correlation between the Bernoulli default indicators, so by definition

\rho_D = \frac{P(A \cap B) - P_A P_B}{\sqrt{P_A(1-P_A) \cdot P_B(1-P_B)}}.

Solving for the joint default probability,

P(A \cap B) = \rho_D \sqrt{P_A(1-P_A) \cdot P_B(1-P_B)} + P_A P_B.

With

P_A = P_B = 0.05

and

\rho_D = 0.30

, the indicator standard deviation is

\sqrt{0.05 \times 0.95} = 0.2179

, so

P(A \cap B) = 0.30 \times (0.2179)^2 + (0.05)^2 = 0.30 \times 0.0475 + 0.0025 = 0.01425 + 0.0025 = 0.01675.

The joint default probability is approximately 1.675%.

Create a Free Account to Access All 86 Questions →

About FreeFellow

FreeFellow is an AI-native exam prep platform for actuarial (SOA & CAS), CFA, CFP, CPA, CAIA, and securities licensing candidates — built around modern AI as a core capability rather than as a bolt-on. Every lesson ships with AI-narrated audio. Every constructed-response item has a copy-to-AI prompt builder so candidates can paste their answer into their own ChatGPT or Claude for self-graded feedback. Fellow members get instant AI grading on essays against the official rubric (currently CFA Level III, expanding to other essay-bearing sections).

The 70% you need to pass — question bank, written solutions, lessons, formula sheet, mixed practice, readiness tracking — is free forever, with no trial period and no credit card. Become a Fellow ($59/quarter or $149/year per track) to unlock mock exams, flashcards with spaced repetition, performance analytics, AI essay grading, and a personalized study plan.