Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which of the following refers to the term "mortality rate"?

Accepted Answer

A) The success rate of new investments. 
B) A one-period rate of interest expected on a bond issued at some date in the future. 
C) The probability that a borrower will default in any given year. 
D) Historic default rate experience of a bond or loan. 
A) The success rate of new investments. 
B) A one-period rate of interest expected on a bond issued at some date in the future. 
C) The probability that a borrower will default in any given year. 
D) Historic default rate experience of a bond or loan.

Question 3

How can discriminant analysis be used to make credit decisions?

Accepted Answer

A) By discriminating between good and bad borrowers. 
B) By using statistical analysis to predict the default probabilities. 
C) By using statistical analysis to isolate and weight factors to arrive at default risk classification of a commercial borrower. 
D) By using statistical analysis to bypass qualitative credit decision making. 
A) By discriminating between good and bad borrowers. 
B) By using statistical analysis to predict the default probabilities. 
C) By using statistical analysis to isolate and weight factors to arrive at default risk classification of a commercial borrower. 
D) By using statistical analysis to bypass qualitative credit decision making.

Question 4

The marginal mortality rate is the probability of a bond or loan defaulting in any given year after it is issued.

Accepted Answer

A) True 
 B)False

Question 5

The debt holders a corporation essentially hold a call option on the value of the firm's assets.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Sustained credit quality problems can drain an FI's capital and net worth.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is a problem in using discriminant analysis to evaluate credit risk?

Accepted Answer

A) It does not consider gradations of default. 
B) The weights in the discriminant function are assumed to be dynamic. 
C) It can include hard-to-quantify factors. 
D) Data on loan specific information of banks are readily available. 
A) It does not consider gradations of default. 
B) The weights in the discriminant function are assumed to be dynamic. 
C) It can include hard-to-quantify factors. 
D) Data on loan specific information of banks are readily available.

Question 10

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

Accepted Answer

A) It is most commonly used in pricing longer-term loans. 
B) It is the lending rate charged to the FI's lowest-risk customers. 
C) It is also known as LIBOR. 
D) It is the rate for interbank dollar loans of a given maturity in the Eurodollar market. 
A) It is most commonly used in pricing longer-term loans. 
B) It is the lending rate charged to the FI's lowest-risk customers. 
C) It is also known as LIBOR. 
D) It is the rate for interbank dollar loans of a given maturity in the Eurodollar market.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What is the expected probability of default in year 2 of two-year maturity B-rated debt?

Accepted Answer

A) 2.83 percent. 
B) 3.00 percent. 
C) 4.43 percent. 
D) 2.68 percent. 
A) 2.83 percent. 
B) 3.00 percent. 
C) 4.43 percent. 
D) 2.68 percent.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Commercial real estate mortgages have been the fastest growing component of real estate loans.

Accepted Answer

A) True 
 B)False

Question 15

Willingness to post collateral may be a signal of more,rather than less,credit risk on the part of the borrower.

Accepted Answer

A) True 
 B)False

Question 16

Credit rationing is a form of managing credit risk.

Accepted Answer

A) True 
 B)False

Question 17

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year?

Accepted Answer

A) 3.00 percent. 
B) 5.06 percent. 
C) 4.00 percent. 
D) 5.00 percent. 
A) 3.00 percent. 
B) 5.06 percent. 
C) 4.00 percent. 
D) 5.00 percent.

Question 18

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate. )

Accepted Answer

A) 10.0 percent. 
B) 9.09 percent. 
C) 14.15 percent. 
D) 12.0 percent. 
A) 10.0 percent. 
B) 9.09 percent. 
C) 14.15 percent. 
D) 12.0 percent.

Question 19

Which of the following is not a qualitative factor in credit risk analysis?

Accepted Answer

A) Borrower reputation. 
B) Borrower ethnic origin. 
C) Leverage position of the borrower. 
D) The level of interest rates. 
A) Borrower reputation. 
B) Borrower ethnic origin. 
C) Leverage position of the borrower. 
D) The level of interest rates.

Question 20

Adjusting interest rates,fees,and other terms upward for increasing amounts of default risk is a way to attempt to realize the expected return on the loan.

Accepted Answer

A) True 
 B)False

Exam 10: Credit Risk: Individual Loan Risk

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

Which of the following refers to the term "mortality rate"?

How can discriminant analysis be used to make credit decisions?

The marginal mortality rate is the probability of a bond or loan defaulting in any given year after it is issued.

The debt holders a corporation essentially hold a call option on the value of the firm's assets.

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

Sustained credit quality problems can drain an FI's capital and net worth.

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

Which of the following is a problem in using discriminant analysis to evaluate credit risk?

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

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

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

Commercial real estate mortgages have been the fastest growing component of real estate loans.

Willingness to post collateral may be a signal of more,rather than less,credit risk on the part of the borrower.

Credit rationing is a form of managing credit risk.

Which of the following is not a qualitative factor in credit risk analysis?

Adjusting interest rates,fees,and other terms upward for increasing amounts of default risk is a way to attempt to realize the expected return on the loan.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters