CAIIB · Bank Financial Management · Module B — Risk Management
CAIIB BFM Unit 15 — Credit Risk: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper II of the December 2026 cycle (Saturday 12 December 2026)
This is the free practice page for CAIIB BFM Unit 15 — Credit Risk (Module B — Risk Management). The CAIIB Mock Centre holds 183 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
BFM · Module B183 MCQs in the Mock Centre5 free belowPaper on 12 December
Key facts examiners test from this unit
Credit risk, the framework and identification — credit risk is the chance that a borrower or counterparty does not pay; the Board decides how much the bank takes, the Credit Policy Committee sets the rules and the independent CRMD enforces them.
Ratings, migration and models — ratings sort borrowers into grades whose past default rates predict defaults for the group; expected loss (PD × LGD × EAD) is priced, unexpected loss is covered by capital.
Changed since the textbook
Financial Stability Report, June 2026 (30 Jun 2026). For scheduled commercial banks in March 2026: CRAR 17.7%, CET1 15.3% and gross NPAs 1.8%; under the severe stress scenario CET1 could fall to 11.4%. Source: ABC Live
Credit Derivatives Directions, 2026 (25 Jun 2026). RBI's Credit Derivatives Directions replace the Master Direction of 10 February 2022: resident non-retail users may use credit default swaps and total return swaps without restrictions on purpose, and exchanges may offer single-name and credit-index CDS. Source: ANI
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 183 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
Credit spread volatility on marked-to-market capital market exposures is driven largely by:
Why (a): The textbook says spreads may widen or tighten with the market's appetite, without a change in the chance of default. (b) is wrong: Spreads move without any default. (c) is wrong: RBI does not set market spreads. (d) is wrong: Tenor alone does not drive spread swings.
Question 2 of 5
CreditMetrics estimates the volatility in asset values caused by:
Why (c): CreditMetrics values a portfolio under each rating it could have at the horizon, using the probabilities of upgrades, downgrades and default, so the volatility it measures comes from credit migration; interest rate, currency and operational losses are separate risks. (a) is wrong: It models credit quality, not rates. (b) is wrong: It models credit quality, not currencies. (d) is wrong: Operational risk is a separate risk.
Question 3 of 5
Why is tracking NPAs around the balance sheet date not enough?
Why (d): The textbook says migration tracking identifies weakness well in advance. (a) is wrong: Confidentiality is not the issue. (b) is wrong: NPAs exist at any date. (c) is wrong: Auditors are not the reason given.
Question 4 of 5
In a synthetic securitisation, how is the pool's credit risk transferred?
Why (c): In a synthetic securitisation the loans stay on the originator's books and only the credit risk moves, through funded credit derivatives (credit-linked notes), unfunded ones (credit default swaps) or guarantees. A sale to an SPV is traditional securitisation; direct assignment and participation transfer the loans themselves. (a) is wrong: A sale to an SPV is traditional securitisation. (b) is wrong: Direct assignment transfers the loans themselves. (d) is wrong: Participation transfers a share of the loans.
Question 5 of 5
What does a credit spread option protect its buyer against?
Why (b): A credit spread option pays when the reference spread widens beyond a strike, so it protects against adverse migration, a fall in credit quality short of default, which a plain credit default swap, paying only on a credit event, does not cover. Currency and operational losses are other risks. (a) is wrong: A CDS covers default; a spread option covers deterioration short of it. (c) is wrong: Currency risk is not credit risk. (d) is wrong: Operational loss is not covered.
0 of 5 answered.
Traps in this unit
Diversification does not remove systematic risk.
A loan's spread widening is not an immediate loss: loans are not marked to market.
Ratings predict groups, not individuals.
Practise all 183 questions on Unit 15. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the BFM Online Mock Centre unlocks all 7,600+ BFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
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