Question 1

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

Accepted Answer

A) Linear discriminant models. 
B) Linear probability models. 
C) Term structure models. 
D) Logit models. 
E) None of the above. 
A) Linear discriminant models. 
B) Linear probability models. 
C) Term structure models. 
D) Logit models. 
E) None of the above.

Question 2

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

Accepted Answer

A) Loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions. 
B) Most loan decisions at the retail level tend to be accept or reject decisions. 
C) Mortgage loans often are discriminated based on loan to price ratios rather than interest rates. 
D) Household borrowers require higher costs of information collection for lenders. 
E) Retail loans tend to be smaller than wholesale loans. 
A) Loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions. 
B) Most loan decisions at the retail level tend to be accept or reject decisions. 
C) Mortgage loans often are discriminated based on loan to price ratios rather than interest rates. 
D) Household borrowers require higher costs of information collection for lenders. 
E) Retail loans tend to be smaller than wholesale loans.

Question 3

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 4

A major problem in estimating RAROC is the measurement of loan risk.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following observations is true of a spot loan?

Accepted Answer

A) It involves a maximum size and a maximum period of time over which the borrower can withdraw funds. 
B) It involves immediate withdrawal of the entire loan amount by the borrower. 
C) It is an unsecured short-term debt instrument issued by corporations. 
D) It is a nonbank loan substitute. 
E) It is a line of credit. 
A) It involves a maximum size and a maximum period of time over which the borrower can withdraw funds. 
B) It involves immediate withdrawal of the entire loan amount by the borrower. 
C) It is an unsecured short-term debt instrument issued by corporations. 
D) It is a nonbank loan substitute. 
E) It is a line of credit.

Question 6

What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Sovereign risk. 
D) Default risk. 
E) Solvency risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Sovereign risk. 
D) Default risk. 
E) Solvency risk.

Question 7

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 second year is

Accepted Answer

A) 4.20 percent. 
B) 98.0 percent. 
C) 2.35 percent. 
D) 2.71 percent. 
E) 3.88 percent. 
A) 4.20 percent. 
B) 98.0 percent. 
C) 2.35 percent. 
D) 2.71 percent. 
E) 3.88 percent.

Question 8

The amount of leverage of a borrower and the probability of default are positively related, but only after some minimum level of debt.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is the major weakness of the linear probability model?

Accepted Answer

A) The model is based on past data of the borrower. 
B) Measurement of the loan risk is difficult. 
C) Estimated probabilities of default may lie outside the interval 0 to 1. 
D) Neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed. 
E) None of the above is a weakness of the linear probability model. 
A) The model is based on past data of the borrower. 
B) Measurement of the loan risk is difficult. 
C) Estimated probabilities of default may lie outside the interval 0 to 1. 
D) Neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed. 
E) None of the above is a weakness of the linear probability model.

Question 10

The traditional duration equation can be used to measure the capital at risk on the loan.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) Whether the borrower's capital structure is beyond the point where additional debt increases the probability of loss of principal or interest. 
B) Whether the relative level of interest rates will encourage the borrower to take excessive risks. 
C) Whether property can be pledged as collateral. 
D) Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk. 
E) Whether the record of the borrower is sufficient to create an implicit contract. 
A) Whether the borrower's capital structure is beyond the point where additional debt increases the probability of loss of principal or interest. 
B) Whether the relative level of interest rates will encourage the borrower to take excessive risks. 
C) Whether property can be pledged as collateral. 
D) Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk. 
E) Whether the record of the borrower is sufficient to create an implicit contract.

Question 12

Commercial paper has become an acceptable substitute source for bank loans formany large corporations.

Accepted Answer

A) True 
 B)False

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

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

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

A major problem in estimating RAROC is the measurement of loan risk.

Which of the following observations is true of a spot loan?

What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract?

The amount of leverage of a borrower and the probability of default are positively related, but only after some minimum level of debt.

Which of the following is the major weakness of the linear probability model?

The traditional duration equation can be used to measure the capital at risk on the loan.

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

Commercial paper has become an acceptable substitute source for bank loans formany large corporations.

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

Exam 10: Credit Risk: Individual Loan Risk

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

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

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

A major problem in estimating RAROC is the measurement of loan risk.

Which of the following observations is true of a spot loan?

What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract?

The amount of leverage of a borrower and the probability of default are positively related, but only after some minimum level of debt.

Which of the following is the major weakness of the linear probability model?

The traditional duration equation can be used to measure the capital at risk on the loan.

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

Commercial paper has become an acceptable substitute source for bank loans formany large corporations.

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