Exam 10: Credit Risk: Individual Loan Risk

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.

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = 0.30 X₂ = 0 X₃ = -0.30 X₄ = 0.15 X₅ = 2.1 Altman's discriminant function takes the form: Z = 1.2 X₁+ 1.4 X₂ + 3.3 X₃ + 0.6 X₄ + 1.0 X₅ Suppose X₃ = 0.2 instead of -0.30.According to Altman's credit scoring model,the firm would fall under which default risk classification?

Commercial loans have been decreasing in importance in bank loan portfolios.

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

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

The following represents two yield curves. Maturity Pure Discount Treasury Yields B-rated Carparate Band Yields (Pure Discaun Bonds) 1 year 3 percent 6 percent 2 year 6 percent 10 percent 20 year 12 percent 17 percent -What is the cumulative mortality rate of the A-rated and B-rated loans for year 2?

Commercial paper typically is secured by specific assets of the borrower.

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.

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?

All other things equal,longer term loans are more likely to be

RAROC (Risk-adjusted return on capital)is a measure of a firm's cost of debt.

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

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

A borrower's reputation is an example of a market-specific factor in the credit decision.

Because they are secured by homes,residential mortgages have demonstrated very little credit risk for FIs.

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): -Using the term structure of default probabilities,the implied default probability for BBB corporate debt during the second year is

Which of the following statements does NOT reflect credit decisions at the retail level?

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

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

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): -Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year).