Question 1

Consider the following hypothetical transition matrix:   Which of the following statements is true?

Accepted Answer

A) A borrower with a risk grade of 2 at the beginning of the year has a 3% probability of being downgraded to a risk grade of 3. 
B) A borrower with a risk grade of 3 at the beginning of the year has a 0.04% probability of being upgraded to a risk grade of 1. 
C) A borrower with a risk grade of 2 at the beginning of the year has a 12% probability of being downgraded to a risk grade of 1. 
D) A borrower with a risk grade of 2 at the beginning of the year has an 85% probability of being upgraded to a risk grade of 1. 
A) A borrower with a risk grade of 2 at the beginning of the year has a 3% probability of being downgraded to a risk grade of 3. 
B) A borrower with a risk grade of 3 at the beginning of the year has a 0.04% probability of being upgraded to a risk grade of 1. 
C) A borrower with a risk grade of 2 at the beginning of the year has a 12% probability of being downgraded to a risk grade of 1. 
D) A borrower with a risk grade of 2 at the beginning of the year has an 85% probability of being upgraded to a risk grade of 1.

Question 2

Consider the following portfolio of assets: $$\begin{array} { | c | c | c | c | c | c | } 
\hline \text { Loan } i & \text { Weight } i & \text { Expected return i } & \sigma / & \sigma ^ { 2 } & \
\hline 1 & 0.30 & 13 \% & 9.06 \% & 82.0 \% & \mathrm { P } _ { 12 } = - 0.87 \
\hline 2 & 0.70 & 11 \% & 8.72 \% & 76.0 \% & \sigma _ { 12 } = - 75.0 \% \
\hline
\end{array}$$ What is the standard deviation of the portfolio (round to two decimals)?

Accepted Answer

A) (0.3)$\sqrt{82.00}$ + (0.7)$\sqrt{76.00}$ = 8.82% 
B) $\sqrt{82.00}$ + $\sqrt{76.00}$ = 17.77% 
C) $\sqrt{15.75}$ = 3.97% 
D) $\sqrt{48.93}$ = 6.99% 
A) (0.3)$\sqrt{82.00}$ + (0.7)$\sqrt{76.00}$ = 8.82% 
B) $\sqrt{82.00}$ + $\sqrt{76.00}$ = 17.77% 
C) $\sqrt{15.75}$ = 3.97% 
D) $\sqrt{48.93}$ = 6.99%

Question 3

Minimum risk portfolio refers to a combination of assets:

Accepted Answer

A) and liabilities that reduces the variance of portfolio returns to the lowest feasible level. 
B) that leverages the variance of portfolio returns to the optimal level. 
C) that reduces the variance of portfolio returns to the lowest feasible level. 
D) that reduces the variance of portfolio returns to zero. 
A) and liabilities that reduces the variance of portfolio returns to the lowest feasible level. 
B) that leverages the variance of portfolio returns to the optimal level. 
C) that reduces the variance of portfolio returns to the lowest feasible level. 
D) that reduces the variance of portfolio returns to zero.

Question 4

Which of the following statements is true?

Accepted Answer

A) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are negatively correlated. 
B) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are highly correlated. 
C) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are not correlated. 
D) FIs may set an aggregate limit of more than the sum of two individual industry limits if two industry groups' performance are negatively correlated. 
A) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are negatively correlated. 
B) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are highly correlated. 
C) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are not correlated. 
D) FIs may set an aggregate limit of more than the sum of two individual industry limits if two industry groups' performance are negatively correlated.

Question 5

Consistent with actual insurance policies, the CDS buyer must own the underlying reference securities.

Accepted Answer

A) True 
 B)False

Question 6

Consider the following data for a two-asset portfolio: $$\begin{array} { | c | l | l | l | l | l | l | } 
\hline \begin{array} { c } 
\text { Loan } \
i
\end{array} & \begin{array} { l } 
\text { Weight } \
i
\end{array} & \begin{array} { l } 
\text { Annual spread between loan rate } \
\text { and Fl's cost of funds }
\end{array} & \text { Annual fees } & \begin{array} { l } 
\text { Loss to FI } \
\text { given default }
\end{array} & \begin{array} { l } 
\text { Expected default } \
\text { frequency }
\end{array} & \
\hline 1 & 0.35 & 4.5 \% & 2.0 \% & 35 \% & 5 \% &P_{12}=-0.28 \
\hline 2 & 0.65 & 5 \% & 2.5 \% & 30 \% & 4 \% & \
\hline
\end{array}$$ Using the Moody's Analytics model:
a.calculate the returns for loans 1 and 2.
b.calculate the risk for loans 1 and 2.
c.calculate the return for the loan portfolio.
d.calculate the risk for the loan portfolio.
e.explain your findings in (a) to (d).

Accepted Answer

a.The returns of loans 1 and 2:
R<sub>1<

Question 7

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?

Accepted Answer

A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted across more than on contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Swap contracts often extend beyond the maturity of normal loan contracts, swap payments can be netted across more than on contract and interest rate swaps involve interest, but not principal. 
A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted across more than on contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Swap contracts often extend beyond the maturity of normal loan contracts, swap payments can be netted across more than on contract and interest rate swaps involve interest, but not principal.

Question 9

Which of the following statements is true?

Accepted Answer

A) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated. 
B) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its size, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated. 
C) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are perfectly correlated. 
D) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated 
A) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated. 
B) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its size, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated. 
C) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are perfectly correlated. 
D) The fundamental lesson of modern portfolio theory (MPT) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated

Question 10

Which of the following statements is true?

Accepted Answer

A) Systematic loan loss risk is a measure of the sensitivity of loan losses in personal loans relative to the losses in commercial loans. 
B) Systematic loan loss risk is a measure of the sensitivity of loan losses of a particular borrower relative to the losses in an FI's loan portfolio. 
C) Systematic loan loss risk is a measure of the sensitivity of loan losses in commercial loans relative to the losses in personal loans. 
D) Systematic loan loss risk is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio. 
A) Systematic loan loss risk is a measure of the sensitivity of loan losses in personal loans relative to the losses in commercial loans. 
B) Systematic loan loss risk is a measure of the sensitivity of loan losses of a particular borrower relative to the losses in an FI's loan portfolio. 
C) Systematic loan loss risk is a measure of the sensitivity of loan losses in commercial loans relative to the losses in personal loans. 
D) Systematic loan loss risk is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio.

Question 11

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?

Accepted Answer

A) Loan sales and securitisation allow FIs to better manage their customer relationships. 
B) Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance-sheet activities of FIs. 
C) Loan sales and securitisation reduce FIs' industry and/or geographical concentration risk. 
D) Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself. 
A) Loan sales and securitisation allow FIs to better manage their customer relationships. 
B) Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance-sheet activities of FIs. 
C) Loan sales and securitisation reduce FIs' industry and/or geographical concentration risk. 
D) Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself.

Question 12

Explain the basic concept of loan loss ratio based models.

Accepted Answer

@#LAT-DLM& Where a measures the loan loss rate for

Question 13

Which of the following statements is true?

Accepted Answer

A) FIs typically increase their concentration limits to increase exposures to others. 
B) FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) FIs typically set concentration limits to reduce their exposure to individual borrowers. 
D) FIs typically decrease their concentration limits to decrease exposures to others. 
A) FIs typically increase their concentration limits to increase exposures to others. 
B) FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) FIs typically set concentration limits to reduce their exposure to individual borrowers. 
D) FIs typically decrease their concentration limits to decrease exposures to others.

Question 14

Minimum risk portfolios generally generate the highest returns.

Accepted Answer

A) True 
 B)False

Question 15

A pure credit swap:

Accepted Answer

A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in the total return swap. 
D) is like buying credit insurance, is like buying a multi-period credit option and eliminates the interest rate risk contained in the total return swap. 
A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in the total return swap. 
D) is like buying credit insurance, is like buying a multi-period credit option and eliminates the interest rate risk contained in the total return swap.

Question 16

Consider the following portfolio of assets: $$\begin{array} { | c | c | c | c | c | c | } 
\hline \text { Loan } i & \text { Weight } i & \text { Expected return } i & \sigma 1 & \sigma 1^ { 2 } & \
\hline 1 & 0.30 & 13 \% & 9.06 \% & 82.0 \% & \mathrm { P } _ { 12 } = - 0.87 \
\hline 2 & 0.70 & 11 \% & 8.72 \% & 76.0 \% & \sigma _ { 12 } = - 75.0 \% \
\hline
\end{array}$$ What is the variance of the portfolio (round to two decimals)?

Accepted Answer

A) (0.3)2(82.0%) + (0.7)2(76.0%) + (0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 30.19 
B) (0.3)2(82.0%) + (0.7)2(76.0%) + [(0.3)(0.7)]2 * (-0.87) * (9.06%)(8.72%) = 41.59 
C) (0.3)2(82.0%) + (0.7)2(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 15.75 
D) (0.3)(82.0%) + (0.7)(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 48.93 
A) (0.3)2(82.0%) + (0.7)2(76.0%) + (0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 30.19 
B) (0.3)2(82.0%) + (0.7)2(76.0%) + [(0.3)(0.7)]2 * (-0.87) * (9.06%)(8.72%) = 41.59 
C) (0.3)2(82.0%) + (0.7)2(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 15.75 
D) (0.3)(82.0%) + (0.7)(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 48.93

Consider the following hypothetical transition matrix: Which of the following statements is true?

Consider the following portfolio of assets: Loan i Weight i Expected return i \sigma/ 1 0.30 13\% 9.06\% 82.0\% =-0.87 2 0.70 11\% 8.72\% 76.0\% =-75.0\% What is the standard deviation of the portfolio (round to two decimals)?

Minimum risk portfolio refers to a combination of assets:

Which of the following statements is true?

Consistent with actual insurance policies, the CDS buyer must own the underlying reference securities.

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?

Which of the following statements is true?

Which of the following statements is true?

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?

Explain the basic concept of loan loss ratio based models.

Which of the following statements is true?

Minimum risk portfolios generally generate the highest returns.

A pure credit swap:

Consider the following portfolio of assets: Loan i Weight i Expected return i \sigma1 \sigma 1 0.30 13\% 9.06\% 82.0\% =-0.87 2 0.70 11\% 8.72\% 76.0\% =-75.0\% What is the variance of the portfolio (round to two decimals)?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

Market Risk

Credit Risk I: Individual Loan Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risks

Capital Management and Adequacy

Filters

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

Consider the following hypothetical transition matrix: Which of the following statements is true?

Consider the following portfolio of assets: Loan i Weight i Expected return i \sigma/ 1 0.30 13\% 9.06\% 82.0\% =-0.87 2 0.70 11\% 8.72\% 76.0\% =-75.0\% What is the standard deviation of the portfolio (round to two decimals)?

Minimum risk portfolio refers to a combination of assets:

Which of the following statements is true?

Consistent with actual insurance policies, the CDS buyer must own the underlying reference securities.

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?

Which of the following statements is true?

Which of the following statements is true?

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?

Explain the basic concept of loan loss ratio based models.

Which of the following statements is true?

Minimum risk portfolios generally generate the highest returns.

A pure credit swap:

Consider the following portfolio of assets: Loan i Weight i Expected return i \sigma1 \sigma 1 0.30 13\% 9.06\% 82.0\% =-0.87 2 0.70 11\% 8.72\% 76.0\% =-75.0\% What is the variance of the portfolio (round to two decimals)?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

Market Risk

Credit Risk I: Individual Loan Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risks

Capital Management and Adequacy

Filters