The following represents two yield curves. \[\begin{array} { | l | c | c | } \hline \text { Maturity } & \begin{array} { c } \text { Pure Discount } \\ \text { Treasury Yields } \end{array} & \begin{array} { c } \text { B-rated Corporate Bond Yields } \\ \text { (Pure Discount Bonds) } \end{array} \\ \hline 1 \text { year } & 3 \text { percent } & 6 \text { percent } \\ \hline 2 \text { year } & 6 \text { percent } & 10 \text { percent } \\ \hline 20 \text { year } & 12 \text { percent } & 17 \text { percent } \\ \hline \end{array}\] -What is the probability that two-year B-rated corporate debt will be fully repaid?

A) 92.9 percent. B) 95.6 percent. C) 97.2 percent. D) 7.10 percent. E) 4.40 percent. A) 92.9 percent. B) 95.6 percent. C) 97.2 percent. D) 7.10 percent. E) 4.40 percent.

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): \[\begin{array} { | l | l | l | c | } \hline & \text { Spot 1 Year } & \text { Spot 2 Year } & \begin{array} { l } \text { (1-year maturity) } \\ \text { Forward 1-year } \end{array} \\ \hline \text { Treasury } & 3.0 \text { percent } & 4.75 \text { percent } & \mathrm { X } \\ \hline \text { BBB Corporate Debt } & 7.5 \text { percent } & 9.15 \text { percent } & \mathrm { Y } \\ \hline \end{array}\] -The cumulative probability of repayment of BBB corporate debt over the next two years is

A) 99.84 percent. B) 92.10 percent. C) 4.45 percent. D) 95.70 percent. E) 7.90 percent. A) 99.84 percent. B) 92.10 percent. C) 4.45 percent. D) 95.70 percent. E) 7.90 percent.

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): \[\begin{array} { | l | l | l | c | } \hline & \text { Spot 1 Year } & \text { Spot 2 Year } & \begin{array} { l } \text { (1-year maturity) } \\ \text { Forward 1-year } \end{array} \\ \hline \text { Treasury } & 3.0 \text { percent } & 4.75 \text { percent } & \mathrm { X } \\ \hline \text { BBB Corporate Debt } & 7.5 \text { percent } & 9.15 \text { percent } & \mathrm { Y } \\ \hline \end{array}\] -Using the term structure of default probabilities, the implied default probability for BBB corporate debt during the current year is

A) 98.0 percent. B) 2.35 percent. C) 4.19 percent. D) 3.90 percent. E) 2.71 percent. A) 98.0 percent. B) 2.35 percent. C) 4.19 percent. D) 3.90 percent. E) 2.71 percent.

The following represents two yield curves. \[\begin{array} { | l | c | c | } \hline \text { Maturity } & \begin{array} { c } \text { Pure Discount } \\ \text { Treasury Yields } \end{array} & \begin{array} { c } \text { B-rated Corporate Bond Yields } \\ \text { (Pure Discount Bonds) } \end{array} \\ \hline 1 \text { year } & 3 \text { percent } & 6 \text { percent } \\ \hline 2 \text { year } & 6 \text { percent } & 10 \text { percent } \\ \hline 20 \text { year } & 12 \text { percent } & 17 \text { percent } \\ \hline \end{array}\] -What is the expected probability of default in year 2 of two-year maturity B-rated debt?

A) 2.83 percent. B) 3.00 percent. C) 4.43 percent. D) 2.68 percent. E) 5.00 percent. A) 2.83 percent. B) 3.00 percent. C) 4.43 percent. D) 2.68 percent. E) 5.00 percent.

Exam 10: Credit Risk: Individual Loan Risk

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 probability that two-year B-rated corporate debt will be fully repaid?

(Multiple Choice)

4.9/5

(75)

Question 81

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

(True/False)

4.9/5

(79)

Question 82

Junk bonds are bonds that are rated less than investment grade by bond-rating agencies.

(True/False)

4.9/5

(71)

Question 83

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

(True/False)

4.8/5

(83)

Question 84

Which of the following loan applicant characteristics is not relevant in the credit approval decision?

(Multiple Choice)

4.8/5

(93)

Question 85

Borrower reputation is important in assessing credit quality because

(Multiple Choice)

4.9/5

(88)

Question 86

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): Spot 1 Year Spot 2 Year (1-year maturity) Forward 1-year Treasury 3.0 percent 4.75 percent BBB Corporate Debt 7.5 percent 9.15 percent -The cumulative probability of repayment of BBB corporate debt over the next two years is

(Multiple Choice)

4.8/5

(77)

Question 87

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

(Multiple Choice)

5.0/5

(82)

Question 88

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

(True/False)

4.8/5

(68)

Question 89

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

(Multiple Choice)

4.9/5

(82)

Question 90

Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?

(Multiple Choice)

4.9/5

(88)

Question 91

Residential mortgages are the smallest component of bank real estate loan portfolios.

(True/False)

4.8/5

(83)

Question 92

RAROC is a measure of a firm's cost of debt.

(True/False)

4.7/5

(72)

Question 93

Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and not by credit rationing.

(True/False)

4.9/5

(74)

Question 94

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 -The Z score for the firm would be

(Multiple Choice)

4.8/5

(90)

Question 95

How can discriminant analysis be used to make credit decisions?

(Multiple Choice)

4.9/5

(73)

Question 96

Which of the following is NOT characteristic of the real estate portfolio for most banks?

(Multiple Choice)

4.8/5

(79)

Question 97

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): Spot 1 Year Spot 2 Year (1-year maturity) Forward 1-year Treasury 3.0 percent 4.75 percent BBB Corporate Debt 7.5 percent 9.15 percent -Using the term structure of default probabilities, the implied default probability for BBB corporate debt during the current year is

(Multiple Choice)

4.8/5

(96)

Question 98

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 expected probability of default in year 2 of two-year maturity B-rated debt?

(Multiple Choice)

4.8/5

(69)

Question 99

The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent -What is the capital (loan) risk of the loan if the current average level of interest rates for this category of bonds is 12 percent?

(Multiple Choice)

5.0/5

(79)

Question 100

Exam 10: Credit Risk: Individual Loan Risk

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

Junk bonds are bonds that are rated less than investment grade by bond-rating agencies.

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

Which of the following loan applicant characteristics is not relevant in the credit approval decision?

Borrower reputation is important in assessing credit quality because

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.

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

Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?

Residential mortgages are the smallest component of bank real estate loan portfolios.

RAROC is a measure of a firm's cost of debt.

Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and not by credit rationing.

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 -The Z score for the firm would be

How can discriminant analysis be used to make credit decisions?

Which of the following is NOT characteristic of the real estate portfolio for most banks?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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