Question-31: What all are the probability distribution, can be used to estimates the losses for a bond portfolio?

Answer: Well known are below two

• Value-at-risk (VaR)
• Conditional VaR (CVaR).

Question-32: Which are the categories of models, which can be used for Credit Risk estimation?

Answer: The models are divided into three categories:

• Structural models
• Reduced-form model
• Incomplete-information models.

Question-33: What do you mean by inflation risk for a bond?

Answer: Inflation risk, also known as purchasing-power risk, arises because of the variation in the value of cash-flows from a bond due to inflation. Suppose, as an investor you purchases a five-year bond in which you can realize a coupon rate of 10%, but the rate of inflation is 11% (usually, in emerging country), which causes purchasing-power of the cash-flow to be reduced.

Question-34: How does inflation risk affects the fixed and floating rate bonds?

Answer: Floating-rate bonds have a lower level of inflation risk than fixed-rate bonds.

Question-35: What do you mean by bonds true value?

Answer: Bonds true value is indicated by a recent transaction.