Question 1

Which of the following statements is true?

Accepted Answer

A)  Credit rationing means that the FI restricts the quantity of loans made available to an individual borrower. 
B)  Credit rationing means that the FI restricts the type of loans made available to an individual borrower. 
C)  Credit rationing means that the FI restricts the quality of loans made available to an individual borrower. 
D)  Credit rationing means that the FI does not have sufficient funds available for lending and thus only grants loans to selected borrowers. 
A)  Credit rationing means that the FI restricts the quantity of loans made available to an individual borrower. 
B)  Credit rationing means that the FI restricts the type of loans made available to an individual borrower. 
C)  Credit rationing means that the FI restricts the quality of loans made available to an individual borrower. 
D)  Credit rationing means that the FI does not have sufficient funds available for lending and thus only grants loans to selected borrowers.

Question 2

Credit card facilities is a revolving loan product.

Accepted Answer

A) True 
 B)False

Question 3

Consider the case of ABC Company. The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2. What is ABC Company's cumulative default probability (round to two decimals)?

Accepted Answer

A)  14.00 per cent 
B)  11.00 per cent 
C)  99.76 per cent 
D)  10.76 per cent 
A)  14.00 per cent 
B)  11.00 per cent 
C)  99.76 per cent 
D)  10.76 per cent

Question 4

Consider the case of a simple one-period framework. If i = 12.30 per cent and k = 13.87 per cent, what is the risk premium on the corporate loan (round to two decimals)?

Accepted Answer

A)  13.87% - 12.30% = 1.57%. 
B)  13.87% $\times$ 12.30% = 0.0171 = 1.71%. 
C)  13.87% / 12.30% = 1.13%. 
D)  The risk premium equals k = 13.87 per cent. 
A)  13.87% - 12.30% = 1.57%. 
B)  13.87% $\times$ 12.30% = 0.0171 = 1.71%. 
C)  13.87% / 12.30% = 1.13%. 
D)  The risk premium equals k = 13.87 per cent.

Question 5

Which of the following statements is true?

Accepted Answer

A)  A line of credit facility is a credit facility with a maximum size and a minimum period of time over which the borrower can withdraw funds. 
B)  A line of credit facility is a credit facility with a minimum size and a minimum period of time over which the borrower can withdraw funds. 
C)  A line of credit facility is a credit facility with a maximum size and a maximum period of time over which the borrower can withdraw funds. 
D)  A line of credit facility is a credit facility with a minimum size and a maximum period of time over which the borrower can withdraw funds. 
A)  A line of credit facility is a credit facility with a maximum size and a minimum period of time over which the borrower can withdraw funds. 
B)  A line of credit facility is a credit facility with a minimum size and a minimum period of time over which the borrower can withdraw funds. 
C)  A line of credit facility is a credit facility with a maximum size and a maximum period of time over which the borrower can withdraw funds. 
D)  A line of credit facility is a credit facility with a minimum size and a maximum period of time over which the borrower can withdraw funds.

Question 6

The prime lending rate is the:

Accepted Answer

A)  risk premium periodically set by the RBA. 
B)  base lending rate periodically set by banks. 
C)  base lending rate periodically set by the RBA. 
D)  risk premium periodically set by banks. 
A)  risk premium periodically set by the RBA. 
B)  base lending rate periodically set by banks. 
C)  base lending rate periodically set by the RBA. 
D)  risk premium periodically set by banks.

Question 7

Mortality rates analyse historic default risk experience of bonds and loans of similar quality.

Accepted Answer

A) True 
 B)False

Question 8

The term 'loan rating' refers to the process of individual loans being given credit rating by:

Accepted Answer

A)  rating agencies dependent on the lender's credit assessment. 
B)  lenders dependent on a credit rating agency's credit assessment 
C)  lenders independent of a credit rating agency's credit assessment. 
A)  rating agencies dependent on the lender's credit assessment. 
B)  lenders dependent on a credit rating agency's credit assessment 
C)  lenders independent of a credit rating agency's credit assessment.

Question 9

Which of the following statements is true?

Accepted Answer

A)  An example of a covenant is a restriction that limits those actions of the borrower that have an impact on the probability of repayment. 
B)  An example of a covenant is a restriction that encourages those actions of the borrower that have an impact on the probability of repayment. 
C)  A covenant is a restriction written into either bond or loan contracts. 
D)  All of the listed options are correct. 
A)  An example of a covenant is a restriction that limits those actions of the borrower that have an impact on the probability of repayment. 
B)  An example of a covenant is a restriction that encourages those actions of the borrower that have an impact on the probability of repayment. 
C)  A covenant is a restriction written into either bond or loan contracts. 
D)  All of the listed options are correct.

Question 10

How would you interpret a Z score of 2.25?

Accepted Answer

A)  The Z score lies within the 'safe' zone and thus a loan should be granted. 
B)  The Z score lies within the 'high default' zone and thus a loan should be granted. 
C)  The Z score lies within the 'zone of ignorance' and thus the borrower may or may not default. 
D)  The interpretation of the Z score is always dependent on an FI manager's subjective opinion. 
A)  The Z score lies within the 'safe' zone and thus a loan should be granted. 
B)  The Z score lies within the 'high default' zone and thus a loan should be granted. 
C)  The Z score lies within the 'zone of ignorance' and thus the borrower may or may not default. 
D)  The interpretation of the Z score is always dependent on an FI manager's subjective opinion.

Question 11

Models of credit risk measurement include:

Accepted Answer

A)  term structure of credit risk approach. 
B)  mortality rate approach 
C)  RAROC and option models. 
D)  All of the listed options are correct. 
A)  term structure of credit risk approach. 
B)  mortality rate approach 
C)  RAROC and option models. 
D)  All of the listed options are correct.

Question 12

The linear probability model uses:

Accepted Answer

A)  forecasted data, such as predicted future prices, as inputs into a model to explain repayment experience on old loans. 
B)  current indices, such as consumer price index, as inputs into a model to explain repayment experience on old loans. 
C)  past data, such as financial ratios, as inputs into a model to explain repayment experience on old loans. 
D)  None of the listed options are correct. 
A)  forecasted data, such as predicted future prices, as inputs into a model to explain repayment experience on old loans. 
B)  current indices, such as consumer price index, as inputs into a model to explain repayment experience on old loans. 
C)  past data, such as financial ratios, as inputs into a model to explain repayment experience on old loans. 
D)  None of the listed options are correct.

Question 13

Consider the case of a simple one-period framework. If i = 12.50 per cent, k = 14.85 per cent, p = 0.98, and $\gamma$ = 0.85 what is the required risk premium (round to two decimals)?

Accepted Answer

A)  0.34 per cent 
B)  0.35 per cent 
C)  0.98 per cent 
D)  2.35 per cent 
A)  0.34 per cent 
B)  0.35 per cent 
C)  0.98 per cent 
D)  2.35 per cent

Question 14

Which of the following is the correct definition of leverage?

Accepted Answer

A)  The ratio of equity to debt. 
B)  The ratio of assets to debt. 
C)  The ratio of debt to assets. 
D)  The ratio of debt to equity. 
A)  The ratio of equity to debt. 
B)  The ratio of assets to debt. 
C)  The ratio of debt to assets. 
D)  The ratio of debt to equity.

Question 15

Assume that B = $200 000, r = 1 year, i = 7 per cent, d = 0.9, N(h1) = 0.174120 and N(h2) = 0.793323. Using Moody's KMV Credit Monitor Model, what is the current market value of the loan (round to two decimals)?

Accepted Answer

A)  $184 015.32 
B)  $186 478.64 
C)  $200 000.00 
D)  $214 000.00 
A)  $184 015.32 
B)  $186 478.64 
C)  $200 000.00 
D)  $214 000.00

Question 16

Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.

Accepted Answer

A) True 
 B)False

Question 17

A company with an Altman Z score of 3.15 should not be granted a loan due to a high default probability.

Accepted Answer

A) True 
 B)False

Question 18

Assume that there are two factors influencing the past default behaviour of borrowers; these being the debt to equity ratio and the sales to assets ratio. Based on past default (repayment) experience, the linear probability model is estimated as Zi = 0.3(D/Ei) + 0.15 (S/Ai). Assume that a prospective borrower has a D/E ratio of 0.9 and a sales to assets ratio of 2.5. What is the borrower's probability of default?

Accepted Answer

A)  0.885 
B)  0.645 
C)  0.45 
D)  3.4 
A)  0.885 
B)  0.645 
C)  0.45 
D)  3.4

Question 19

Which of the following statements in relation to Altman's discriminant function is true?

Accepted Answer

A)  The higher the Z score the higher the probability of default. 
B)  The loan size does not influence the result of the Altman Z score model. 
C)  The size of the borrower does not influence the result of the Altman Z score model. 
D)  The Altman Z score model always produces an exact reject or accept decision. 
A)  The higher the Z score the higher the probability of default. 
B)  The loan size does not influence the result of the Altman Z score model. 
C)  The size of the borrower does not influence the result of the Altman Z score model. 
D)  The Altman Z score model always produces an exact reject or accept decision.

Question 20

Which of the following statements is true?

Accepted Answer

A)  A credit scoring model is a mathematical model that considers a borrower's credit rating to make loan decisions. 
B)  A credit scoring model is a model that relies on expert knowledge to make loan decisions. 
C)  A credit scoring model is a mathematical model that uses observed borrower characteristics to calculate a score representing the applicant's probability of default or to sort borrowers into different default classes. 
D)  A credit scoring model is a mathematical model that uses neural networks to make loan decisions. 
A)  A credit scoring model is a mathematical model that considers a borrower's credit rating to make loan decisions. 
B)  A credit scoring model is a model that relies on expert knowledge to make loan decisions. 
C)  A credit scoring model is a mathematical model that uses observed borrower characteristics to calculate a score representing the applicant's probability of default or to sort borrowers into different default classes. 
D)  A credit scoring model is a mathematical model that uses neural networks to make loan decisions.

Which of the following statements is true?

Credit card facilities is a revolving loan product.

Consider the case of ABC Company. The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2. What is ABC Company's cumulative default probability (round to two decimals)?

Consider the case of a simple one-period framework. If i = 12.30 per cent and k = 13.87 per cent, what is the risk premium on the corporate loan (round to two decimals)?

Which of the following statements is true?

The prime lending rate is the:

Mortality rates analyse historic default risk experience of bonds and loans of similar quality.

The term 'loan rating' refers to the process of individual loans being given credit rating by:

Which of the following statements is true?

How would you interpret a Z score of 2.25?

Models of credit risk measurement include:

The linear probability model uses:

Consider the case of a simple one-period framework. If i = 12.50 per cent, k = 14.85 per cent, p = 0.98, and $\gamma$ = 0.85 what is the required risk premium (round to two decimals)?

Which of the following is the correct definition of leverage?

Assume that B = $200 000, r = 1 year, i = 7 per cent, d = 0.9, N(h₁) = 0.174120 and N(h₂) = 0.793323. Using Moody's KMV Credit Monitor Model, what is the current market value of the loan (round to two decimals)?

Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.

A company with an Altman Z score of 3.15 should not be granted a loan due to a high default probability.

Which of the following statements in relation to Altman's discriminant function is true?

Which of the following statements is true?

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 II: Loan Portfolio and Concentration 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 10: Credit Risk I: Individual Loan Risk

Which of the following statements is true?

Credit card facilities is a revolving loan product.

Consider the case of ABC Company. The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2. What is ABC Company's cumulative default probability (round to two decimals)?

Consider the case of a simple one-period framework. If i = 12.30 per cent and k = 13.87 per cent, what is the risk premium on the corporate loan (round to two decimals)?

Which of the following statements is true?

The prime lending rate is the:

Mortality rates analyse historic default risk experience of bonds and loans of similar quality.

The term 'loan rating' refers to the process of individual loans being given credit rating by:

Which of the following statements is true?

How would you interpret a Z score of 2.25?

Models of credit risk measurement include:

The linear probability model uses:

Consider the case of a simple one-period framework. If i = 12.50 per cent, k = 14.85 per cent, p = 0.98, and γ\gammaγ = 0.85 what is the required risk premium (round to two decimals)?

Which of the following is the correct definition of leverage?

Assume that B = $200 000, r = 1 year, i = 7 per cent, d = 0.9, N(h1) = 0.174120 and N(h2) = 0.793323. Using Moody's KMV Credit Monitor Model, what is the current market value of the loan (round to two decimals)?

Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.

A company with an Altman Z score of 3.15 should not be granted a loan due to a high default probability.

Which of the following statements in relation to Altman's discriminant function is true?

Which of the following statements is true?

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 II: Loan Portfolio and Concentration 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

Consider the case of a simple one-period framework. If i = 12.50 per cent, k = 14.85 per cent, p = 0.98, and $\gamma$ = 0.85 what is the required risk premium (round to two decimals)?

Assume that B = $200 000, r = 1 year, i = 7 per cent, d = 0.9, N(h₁) = 0.174120 and N(h₂) = 0.793323. Using Moody's KMV Credit Monitor Model, what is the current market value of the loan (round to two decimals)?