Consider an FI that holds two loans with the following characteristics: \[\begin{array} { | c | c | c | c | c | c | c | c | } \hline \text { Loan } i & \text { Weight I } & \begin{array} { c } \text { Annual } \\ \text { Ioan rate } \end{array} & \begin{array} { c } \text { Annual Fl's cost of } \\ \text { funds } \end{array} & \text { Annual fees } & \begin{array} { c } \text { Loss to Fl given } \\ \text { default } \end{array} & \begin{array} { c } \text { Expected default } \\ \text { frequency } \end{array} & \\ \hline 1 & 0.30 & 10.0 \% & 4.5 \% & 2.0 \% & 25 \% & 4 \% & \mathrm { PP } _ { 12 } = 0.25 \\ \hline 2 & 0.70 & 11.0 \% & 5.0 \% & 1.5 \% & 20 \% & 3 \% & \\ \hline \end{array}\] What is the risk of the loan portfolio (round to two decimals)?

A) 4.90% B) 3.41% C) 4.16% D) 6.10% A) 4.90% B) 3.41% C) 4.16% D) 6.10%

Explain the following hypothetical table: \[\begin{array} { | l | c c c c c | } \hline { \begin{array} { l } \text { Risk grade at } \\ \text { beginning of } \\ \text { year 1 } \end{array} } & { \text { Risk grade at end of year } } \\ &1 & 2 & 3 & 4 & \text { Default } \\ \hline 1& 0.86 & 0.08 & 0.03 & 0.02 & 0.01\\ \hline 2 & 0.04 & 0.84 & 0.05 & 0.04 & 0.03 \\ \hline 3 & 0.02 & 0.08 & 0.81 & 0.05 & 0.04 \\ \hline 4 & 0.01&0.03&0.10&0.78&0.08\\ \hline \end{array}\] In this context, explain the concepts of loan migration and migration analysis.

Migration analysis uses information from

Consider the following table with information on the weightings and expected returns of two assets held by an FI. \[\begin{array} { | c | c | c | } \hline \text { Loan } i & \text { Weight } i & \text { Expected return } i \\ \hline 1 & 0.35 & 12.35 \% \\ \hline 2 & 0.65 & 10.25 \% \\ \hline \end{array}\] What is the expected return on the portfolio (round to two decimals)?

A) (0.35 + 12.35) - (0.65 + 10.25) = 1.80% B) (0.35 + 0.65) * (12.35 + 10.25) = 22.60% C) (12.35 + 10.25) / 2 = 11.30% D) 0.35 * 12.35 + 0.65 * 10.25 = 10.99% A) (0.35 + 12.35) - (0.65 + 10.25) = 1.80% B) (0.35 + 0.65) * (12.35 + 10.25) = 22.60% C) (12.35 + 10.25) / 2 = 11.30% D) 0.35 * 12.35 + 0.65 * 10.25 = 10.99%

Consider the following table with information on the weightings and expected returns of three assets held by an FI. \[\begin{array} { | c | c | c | } \hline \text { Loan } i & \text { Weight } i & \text { Expected return } i \\ \hline 1 & 0.15 & 12.35 \% \\ \hline 2 & 0.55 & 10.25 \% \\ \hline 3 & 0.30 & 15.75 \% \\ \hline \end{array}\] What is the expected return on the portfolio (round to two decimals)?

A) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) / 3 = 4.07% B) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) * 3 = 36.66% C) 0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75 = 12.22% D) (12.35 + 10.25 + 15.75) / 3 = 12.78% A) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) / 3 = 4.07% B) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) * 3 = 36.66% C) 0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75 = 12.22% D) (12.35 + 10.25 + 15.75) / 3 = 12.78%

Exam 11: Credit Risk II: Loan Portfolio and Concentration Risk

Consider an FI that holds two loans with the following characteristics: Loan i Weight I Annual Ioan rate Annual Fl's cost of funds Annual fees Loss to Fl given default Expected default frequency 1 0.30 10.0\% 4.5\% 2.0\% 25\% 4\% =0.25 2 0.70 11.0\% 5.0\% 1.5\% 20\% 3\% What is the risk of the loan portfolio (round to two decimals)?

(Multiple Choice)

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Question 41

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

(Multiple Choice)

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Question 42

Explain the following hypothetical table: Risk grade at beginning of year 1 Risk grade at end of year 1 2 3 4 Default 1 0.86 0.08 0.03 0.02 0.01 2 0.04 0.84 0.05 0.04 0.03 3 0.02 0.08 0.81 0.05 0.04 4 0.01 0.03 0.10 0.78 0.08 In this context, explain the concepts of loan migration and migration analysis.

(Essay)

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Question 43

Minimum risk portfolio refers to a combination of assets that leverages the variance of portfolio returns to the optimal level.

(True/False)

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Question 44

The concentration limit for a loan portfolio is calculated as the expected default frequency of the borrower multiplied by (one divided by the loss rate).

(True/False)

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Question 45

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

(True/False)

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Question 46

Consider the following table with information on the weightings and expected returns of two assets held by an FI. Loan i Weight i Expected return i 1 0.35 12.35\% 2 0.65 10.25\% What is the expected return on the portfolio (round to two decimals)?

(Multiple Choice)

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Question 47

Which of the following statements is true?

(Multiple Choice)

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Question 48

Using the Moody's Analytics model, the return on a loan can be calculated as the annual all-in-spread minus the loss in the event of default.

(True/False)

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Question 49

A digital default option is a call option whose payoff increases as a yield spread increases above a stated exercise spread.

(True/False)

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Question 50

Migration analysis is a method to:

(Multiple Choice)

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Question 51

Consider the following table with information on the weightings and expected returns of three assets held by an FI. Loan i Weight i Expected return i 1 0.15 12.35\% 2 0.55 10.25\% 3 0.30 15.75\% What is the expected return on the portfolio (round to two decimals)?

(Multiple Choice)

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Question 52

Assume that the maximum loss as a percentage of capital is 12% of an FI's capital to a particular sector.The FI's concentration limit on this sector 35%.What is the sector's loss rate (round to two decimals)?

(Multiple Choice)

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Question 53

Minimum risk portfolio refers to a combination of assets that reduces the variance of portfolio returns to the lowest feasible level.

(True/False)

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Question 54

Which of the following statements is true?

(Multiple Choice)

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Question 55

Which of the following statements is true?

(Multiple Choice)

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Question 56

Which of the following is incorrect in relation to debt recovery rates?

(Multiple Choice)

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Question 57

An FI that invests 40% of funds in a loan with an expected return of 10% and 60% of funds in a loan with an expected return of 12% can expect to earn 11% on its portfolio.

(True/False)

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Question 58

Which of the following statements is true?

(Multiple Choice)

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Question 59

Migration analysis is a method to measure deposit concentration risk by tracking credit ratings of firms in particular sectors or ratings class for usual declines.

(True/False)

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Question 60

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

Minimum risk portfolio refers to a combination of assets that leverages the variance of portfolio returns to the optimal level.

The concentration limit for a loan portfolio is calculated as the expected default frequency of the borrower multiplied by (one divided by the loss rate).

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Consider the following table with information on the weightings and expected returns of two assets held by an FI. Loan i Weight i Expected return i 1 0.35 12.35\% 2 0.65 10.25\% What is the expected return on the portfolio (round to two decimals)?

Which of the following statements is true?

Using the Moody's Analytics model, the return on a loan can be calculated as the annual all-in-spread minus the loss in the event of default.

A digital default option is a call option whose payoff increases as a yield spread increases above a stated exercise spread.

Migration analysis is a method to:

Consider the following table with information on the weightings and expected returns of three assets held by an FI. Loan i Weight i Expected return i 1 0.15 12.35\% 2 0.55 10.25\% 3 0.30 15.75\% What is the expected return on the portfolio (round to two decimals)?

Assume that the maximum loss as a percentage of capital is 12% of an FI's capital to a particular sector.The FI's concentration limit on this sector 35%.What is the sector's loss rate (round to two decimals)?

Minimum risk portfolio refers to a combination of assets that reduces the variance of portfolio returns to the lowest feasible level.

Which of the following statements is true?

Which of the following statements is true?

Which of the following is incorrect in relation to debt recovery rates?

An FI that invests 40% of funds in a loan with an expected return of 10% and 60% of funds in a loan with an expected return of 12% can expect to earn 11% on its portfolio.

Which of the following statements is true?

Migration analysis is a method to measure deposit concentration risk by tracking credit ratings of firms in particular sectors or ratings class for usual declines.

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