Question 1

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Accepted Answer

A) True 
 B)False

Question 2

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk. Which of the following are not advantageous to FIs?

Accepted Answer

A)  Loan sales and securitisation allow FIs to better manage their customer relationships. 
B)  Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance sheet activities of FIs. 
C)  Loan sales and securitisation reduce FIs industry and/or geographical concentration risk. 
D)  Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself. 
A)  Loan sales and securitisation allow FIs to better manage their customer relationships. 
B)  Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance sheet activities of FIs. 
C)  Loan sales and securitisation reduce FIs industry and/or geographical concentration risk. 
D)  Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself.

Question 3

Which of the following statements is true?

Accepted Answer

A)  FIs can reduce profitability by taking advantage of the law of small numbers in their investment decisions. 
B)  FIs can reduce profitability by taking advantage of the law of large numbers in their investment decisions. 
C)  FIs can reduce risk by taking advantage of the law of small numbers in their investment decisions. 
D)  FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions. 
A)  FIs can reduce profitability by taking advantage of the law of small numbers in their investment decisions. 
B)  FIs can reduce profitability by taking advantage of the law of large numbers in their investment decisions. 
C)  FIs can reduce risk by taking advantage of the law of small numbers in their investment decisions. 
D)  FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Question 4

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Accepted Answer

A) True 
 B)False

Question 5

The relationship limit on diversification has also been called the 'paradox of credit'.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is true?

Accepted Answer

A)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 $\le$ r  $\le$ + 1, where r is the correlation coefficient. 
B)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values 0  $\le$ r  $\le$ + 1, where r is the correlation coefficient. 
C)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values +1  $\le$ r  $\le$+ 2, where r is the correlation coefficient. 
D)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1  $\le$ r  $\le$ 0, where r is the correlation coefficient. 
A)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 $\le$ r  $\le$ + 1, where r is the correlation coefficient. 
B)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values 0  $\le$ r  $\le$ + 1, where r is the correlation coefficient. 
C)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values +1  $\le$ r  $\le$+ 2, where r is the correlation coefficient. 
D)  The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1  $\le$ r  $\le$ 0, where r is the correlation coefficient.

Question 7

Which of the following statements is true?

Accepted Answer

A)  FIs typically increase their concentration limits to increase exposures to others. 
B)  FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C)  FIs typically set concentration limits to reduce their exposure to individual borrowers. 
D)  FIs typically decrease their concentration limits to decrease exposures to others. 
A)  FIs typically increase their concentration limits to increase exposures to others. 
B)  FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C)  FIs typically set concentration limits to reduce their exposure to individual borrowers. 
D)  FIs typically decrease their concentration limits to decrease exposures to others.

Question 8

Which of the following statements is true?

Accepted Answer

A)  The risk of a loan reflects the volatility of the loan's default rate around its expected value times the amount lost given default. 
B)  The product of the volatility of the default rate and the loss give default (LG
D)  is called the 'unexpected loss'. 
C)  The product of the volatility of the default rate and the loss give default (LG
D)  is a measure of the loan's risk. 
D)  All of the listed options are correct. 
A)  The risk of a loan reflects the volatility of the loan's default rate around its expected value times the amount lost given default. 
B)  The product of the volatility of the default rate and the loss give default (LG
D)  is called the 'unexpected loss'. 
C)  The product of the volatility of the default rate and the loss give default (LG
D)  is a measure of the loan's risk. 
D)  All of the listed options are correct.

Question 9

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent. What is the concentration limit (round to two decimals)?

Accepted Answer

A)  12% $\times$ (1/0.35) = 34.29% 
B)  35% $\times$ (1/0.12) = 4.2% 
C)  12% / (1 + 0.35) = 8.89% 
D)  35% / (1 + 0.12) = 31.25% 
A)  12% $\times$ (1/0.35) = 34.29% 
B)  35% $\times$ (1/0.12) = 4.2% 
C)  12% / (1 + 0.35) = 8.89% 
D)  35% / (1 + 0.12) = 31.25%

Question 10

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

Accepted Answer

A)  maximum damage limits. 
B)  concentration limits. 
C)  syndication limits. 
D)  minimisation limits. 
A)  maximum damage limits. 
B)  concentration limits. 
C)  syndication limits. 
D)  minimisation limits.

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk. Which of the following are not advantageous to FIs?

Which of the following statements is true?

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

The relationship limit on diversification has also been called the 'paradox of credit'.

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent. What is the concentration limit (round to two decimals)?

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 11: Credit Risk II: Loan Portfolio and Concentration Risk

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk. Which of the following are not advantageous to FIs?

Which of the following statements is true?

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

The relationship limit on diversification has also been called the 'paradox of credit'.

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent. What is the concentration limit (round to two decimals)?

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters