Exam 10: Credit Risk: Individual Loan Risk

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

The following information on the mortality rate of loans as estimated by an FI: -If the cumulative mortality rate in year 3 is 3.46 percent for the B-rated loan, what is its yearly mortality rate in year 3?

Use the following information and the option valuation model for the next two problems. 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?

At some point, further increases in interest rates on specific loans may decrease expected loan returns because of increased probability of default by the borrower.

Long-term loans are more likely to be made under a loan commitment agreement than short-term loans.

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

Credit rationing is a form of managing credit risk.

Which of the following is true of commercial paper?

Unsecured debt is considered to be senior to secured debt.

The exact interest rate to be charged on a fixed-rate loan is agreed upon by all parties at the time the commitment is negotiated.

Using a modified discriminant function similar to Altman's, Burger Bank estimates the following coefficients for its portfolio of loans: Z = 1.4X₁ + 1.09X₂ + 1.5X₃ where X₁ = debt to asset ratio; X₂= net income and X₃ = dividend payout ratio. -What is the Z-score if the debt to asset ratio is 40 percent, net income is 12 percent, and the dividend payout ratio is 60 percent?

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

Discriminant models often ignore hard-to-quantify factors in the credit decision.

Credit rationing by an FI

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

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.

Using a modified discriminant function similar to Altman's, Burger Bank estimates the following coefficients for its portfolio of loans: Z = 1.4X₁ + 1.09X₂ + 1.5X₃ where X₁ = debt to asset ratio; X₂= net income and X₃ = dividend payout ratio. -Using Z = 1.682 as the cut-off rate, what should be the debt to asset ratio of the firm in order for the bank to approve the loan?

The primary difficulty in arranging a syndicated loan is having all of the various lending and borrowing parties reach agreement on terms, rates, and collateral.

Which of the following observations concerning floating-rate loans is NOT true?

The following represents two yield curves. Maturity Pure Discount Treasury Yields B-rated Corporate Bond Yields (Pure Discount Bonds) 1 year 3 percent 6 percent 2 year 6 percent 10 percent 20 year 12 percent 17 percent -What is the implied probability of repayment on one-year B-rated debt?