Exam 10: Credit Risk: Individual Loan Risk

Onyx Corporation has a $200,000 loan that will mature in one year.The risk free interest rate is 6 percent.The standard deviation in the rate of change in the underlying asset's value is 12 percent, and the leverage ratio for Onyx is 0.8 (80 percent).The value for N(h1) is 0.02743, and the value for N(h2) is 0.96406. What is the current market value of the loan?

Onyx Corporation has a $200,000 loan that will mature in one year.The risk free interest rate is 6 percent.The standard deviation in the rate of change in the underlying asset's value is 12 percent, and the leverage ratio for Onyx is 0.8 (80 percent).The value for N(h1) is 0.02743, and the value for N(h2) is 0.96406. What is the required yield on this risky loan?

Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year).

Calculate the value of y (the implied forward rate on one-year maturity BBB corporate debt to be delivered in one year).

Which of the following is true of commercial paper?

Which of the following statements involving the promised return on a loan is NOT true?

What is the implied probability of repayment on one-year B-rated debt?

Marginal default probability refers to the

The following information on the mortality rate of loans as estimated by an FI: [Reference: 10-112] -What is the cumulative mortality rate of the A-rated and B-rated loans for year 2?

During the decade of the 1990s the asset quality of U.S.banks continued to improve.

How can discriminant analysis be used to make credit decisions?

Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?

The amount of security or collateral on a loan and the interest rate or risk premium on a loan normally are negatively related.

According to option pricing models of credit risk and default, the debt holders of a corporation may have to accept assets which have a value less than the face value of the debt.

Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and not by credit rationing.

The primary benefit from credit scoring is that credit lenders can more accurately predict a borrower's performance without having to use more resources.

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

Confidence Bank has made a loan to Risky Corporation.The loan terms include a default risk-free borrowing rate of 8 percent, a risk premium of 3 percent, an origination fee of 0.1875 percent, and a 9 percent compensating balance requirement.Required reserves at the Fed are 6 percent.What is the expected or promised gross return on the loan?

Relationship pricing involves pricing for specific services which depend, in part, on the amount or number of services that are used by the customer.

From the lender's point of view, debt can be evaluated as