Exam 10: Credit Risk: Individual Loan Risk

Using a modified discriminant function similar to Altman's, Burger Bank estimates the following coefficients for its portfolio of loans: Z = 1.4X₁ + 1.09X₂ + 1.5X₃ where X₁ = debt to asset ratio; X₂ = net income and X₃ = dividend payout ratio. What is the Z-score if the debt to asset ratio is 40 percent, net income is 12 percent, and the dividend payout ratio is 60 percent?

What is the least important factor determining bankruptcy, according to the Altman Z-score model?

Simulations by Moody's Analytics have shown which of the following models to be relatively better predictors of corporate failure and distress?

One of the weaknesses of estimating expected default rates is that the analysis is based on historic data.

Credit scoring models include all of the following broad types of models EXCEPT

Credit scoring models are advantageous because of their ability to sort borrowers into different default risk classes.

LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the domestic money-center bank market.

What is the probability that two-year B-rated corporate debt will be fully repaid?

The traditional duration equation can be used to measure the capital at risk of a loan.

Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution, the actual return to the lender on the usable portion of these loans is higher.

Which of the following is true of the prime lending rate?

In making credit decisions, which of the following items is considered a market-specific factor?

Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers.Based on past default (repayment) experience, the linear probability model is estimated as: PD_i = 0.5(D/E_i) + 0.1(S/A_i).If a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the expected probability of default is

Adjustable rate mortgages have interest rates that adjust periodically according to the movement in some index.

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Which of the following observations concerning floating-rate loans is NOT true?

Commercial paper has become an acceptable substitute source for bank loans for many large corporations.

The probability that a borrower would default in any specific time period is the marginal default probability.

There is a positive relationship between the interest rate charged on a retail loan and the expected return on the loan.

Usury ceilings are maximum interest rates imposed by federal legislation that FIs are allowed to charge on consumer and mortgage debt.