Question 1

Term structure of credit risk approach models are also known as:

Accepted Answer

A) reduced-form models 
B) mortality rate models 
C) RAROC models 
D) structural models 
A) reduced-form models 
B) mortality rate models 
C) RAROC models 
D) structural models A

Question 2

The term 'spot loan' refers to a loan:

Accepted Answer

A) that is granted on the spot 
B) that needs to be repaid on the spot 
C) granted at the spot rate 
D) for which the full loan amount is withdrawn by the borrower on the spot 
A) that is granted on the spot 
B) that needs to be repaid on the spot 
C) granted at the spot rate 
D) for which the full loan amount is withdrawn by the borrower on the spot D

Question 3

Assume that i1 = 11% and i2 = 12%, and that k1 = 14.50% and k2 = 16.50%.What is the expected probability of repayment on the one-year corporate bonds in one year's time (round to two decimals)?

Accepted Answer

A) 86.99% 
B) 81.47% 
C) 86.50% 
D) 95.34% 
A) 86.99% 
B) 81.47% 
C) 86.50% 
D) 95.34% D

Question 4

Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10% and a sudden change in the credit premium of 1% is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

Accepted Answer

A) 10.00% 
B) 11.00% 
C) 22.00% 
D) 50.00% 
A) 10.00% 
B) 11.00% 
C) 22.00% 
D) 50.00%

Question 5

The estimate of loan (or capital) risk (∆L) can be calculated as follows: 
DL * L * [∆R / (1+R)].

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is true?

Accepted Answer

A) Arbitrage means the inability to make a profit without taking risk. 
B) Arbitrage means that an FI takes risks in order to make a profit. 
C) Arbitrage means that an FI does not take any risks and thus does not make a profit. 
D) Arbitrage means the ability to make a profit without taking risk. 
A) Arbitrage means the inability to make a profit without taking risk. 
B) Arbitrage means that an FI takes risks in order to make a profit. 
C) Arbitrage means that an FI does not take any risks and thus does not make a profit. 
D) Arbitrage means the ability to make a profit without taking risk.

Question 7

By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.

Accepted Answer

A) True 
 B)False

Question 8

Consider the following scenario: an FI charges a 0.5% loan origination fee and imposes an 8% compensating balance requirement to be held as non-interest-bearing demand deposits.It further sets aside reserves held at the central bank.The value of these reserves is 10% of deposits.The base lending rate is 9% and the credit risk premium for a specific borrower is 3%.What is the ROA on the loan?

Accepted Answer

A) 12.60% 
B) 11.00% 
C) 11.50% 
D) There is not enough information to solve the question. 
A) 12.60% 
B) 11.00% 
C) 11.50% 
D) There is not enough information to solve the question.

Question 9

Consider the following data of a prospective borrower. $$\begin{array} { | l | r | } 
\hline \text { Current assets } & \$ 120000 \
\hline \text { Current liabilities } & \$ 60000 \
\hline \text { Total assets } & \$ 500000 \
\hline \text { Market value of equity } & \$ 50000 \
\hline \text { Book value of equity } & \$ 60000 \
\hline \text { Retained earnings } & \$ 12000 \
\hline \text { Interest expense } & \$ 20000 \
\hline \text { Profit before tax } & \$ 200000 \
\hline \text { Sales revenue } & \$ 1000000 \
\hline
\end{array}$$ What is this company's Z-score ?

Accepted Answer

A) 2.70 
B) 2.80 
C) 2.90 
D) 3.00 
A) 2.70 
B) 2.80 
C) 2.90 
D) 3.00

Question 10

Compensating balance is a proportion of:

Accepted Answer

A) a loan that a borrower is required to hold on deposit at a correspondent bank 
B) a loan that a borrower is required to hold on deposit in foreign reserves 
C) a loan that a borrower is required to hold on deposit at the lending institution 
D) the investment that a borrower is required to hold on deposit at the lending institution 
A) a loan that a borrower is required to hold on deposit at a correspondent bank 
B) a loan that a borrower is required to hold on deposit in foreign reserves 
C) a loan that a borrower is required to hold on deposit at the lending institution 
D) the investment that a borrower is required to hold on deposit at the lending institution

Question 11

The term disintermediation refers to the process in which firms access:

Accepted Answer

A) money markets directly 
B) money markets via financial intermediaries 
C) capital markets directly 
D) capital markets via financial intermediaries 
A) money markets directly 
B) money markets via financial intermediaries 
C) capital markets directly 
D) capital markets via financial intermediaries

Question 12

The key factors entering into the credit decision include:

Accepted Answer

A) borrower-specific factors that are idiosyncratic to the individual borrower 
B) market-specific factors that have an impact on all borrowers at the time of the credit decision 
C) global-economic factors that have an impact on all FIs at the time of credit decision 
D) borrower-specific factors that are idiosyncratic to the individual borrower and market-specific factors that have an impact on all borrowers at the time of the credit decision 
A) borrower-specific factors that are idiosyncratic to the individual borrower 
B) market-specific factors that have an impact on all borrowers at the time of the credit decision 
C) global-economic factors that have an impact on all FIs at the time of credit decision 
D) borrower-specific factors that are idiosyncratic to the individual borrower and market-specific factors that have an impact on all borrowers at the time of the credit decision

Question 13

Which of the following statements is true?

Accepted Answer

A) A credit scoring model is a mathematical model that considers a borrower's credit rating to make loan decisions. 
B) A credit scoring model is a model that relies on expert knowledge to make loan decisions. 
C) A credit scoring model is a mathematical model that uses observed borrower characteristics to calculate a score representing the applicant's probability of default or to sort borrowers into different default classes. 
D) A credit scoring model is a mathematical model that uses neural networks to make loan decisions. 
A) A credit scoring model is a mathematical model that considers a borrower's credit rating to make loan decisions. 
B) A credit scoring model is a model that relies on expert knowledge to make loan decisions. 
C) A credit scoring model is a mathematical model that uses observed borrower characteristics to calculate a score representing the applicant's probability of default or to sort borrowers into different default classes. 
D) A credit scoring model is a mathematical model that uses neural networks to make loan decisions.

Question 14

Consider the case of a simple one-period framework.If i = 12.30% and k = 13.87%, what is the risk premium on the corporate loan (round to two decimals)?

Accepted Answer

A) 13.87% - 12.30% = 1.57% 
B) 13.87% * 12.30% = 0.0171 = 1.71% 
C) 13.87% / 12.30% = 1.13% 
D) The risk premium equals k = 13.87% 
A) 13.87% - 12.30% = 1.57% 
B) 13.87% * 12.30% = 0.0171 = 1.71% 
C) 13.87% / 12.30% = 1.13% 
D) The risk premium equals k = 13.87%

Question 15

Models of credit risk measurement include:

Accepted Answer

A) term structure of credit risk approach. 
B) mortality rate approach 
C) RAROC and option models. 
D) All of the listed options are correct. 
A) term structure of credit risk approach. 
B) mortality rate approach 
C) RAROC and option models. 
D) All of the listed options are correct.

Question 16

Banks have been partially responsible for big corporate collapses such as Enron.

Accepted Answer

A) True 
 B)False

Question 17

Assume the interest rate in the market for one-year zero-coupon government bonds is i = 7.5% and the rate for one-year zero-coupon grade BB bonds is k = 11.8%.What is the implied probability of default on the corporate bond (round to two decimals)?

Accepted Answer

A) 3.85% 
B) 4.00% 
C) 96.00% 
D) 96.15% 
A) 3.85% 
B) 4.00% 
C) 96.00% 
D) 96.15%

Question 18

Non-performing loans are loans characterised by some type of default-from non-payment to delays in payment of interest and/or principal.

Accepted Answer

A) True 
 B)False

Question 19

Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.

Accepted Answer

A) True 
 B)False

Question 20

What are the major ideas behind KMV's Credit Monitor model?

Accepted Answer

The KMV model uses an option pricing mod

Term structure of credit risk approach models are also known as:

The term 'spot loan' refers to a loan:

Assume that i₁ = 11% and i₂ = 12%, and that k₁ = 14.50% and k₂ = 16.50%.What is the expected probability of repayment on the one-year corporate bonds in one year's time (round to two decimals)?

Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10% and a sudden change in the credit premium of 1% is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

The estimate of loan (or capital) risk (∆L) can be calculated as follows: D_L * L * [∆R / (1+R)].

Which of the following statements is true?

By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.

Compensating balance is a proportion of:

The term disintermediation refers to the process in which firms access:

The key factors entering into the credit decision include:

Which of the following statements is true?

Consider the case of a simple one-period framework.If i = 12.30% and k = 13.87%, what is the risk premium on the corporate loan (round to two decimals)?

Models of credit risk measurement include:

Banks have been partially responsible for big corporate collapses such as Enron.

Assume the interest rate in the market for one-year zero-coupon government bonds is i = 7.5% and the rate for one-year zero-coupon grade BB bonds is k = 11.8%.What is the implied probability of default on the corporate bond (round to two decimals)?

Non-performing loans are loans characterised by some type of default-from non-payment to delays in payment of interest and/or principal.

Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.

What are the major ideas behind KMV's Credit Monitor model?

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 II: Loan Portfolio and Concentration 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 10: Credit Risk I: Individual Loan Risk

Term structure of credit risk approach models are also known as:

The term 'spot loan' refers to a loan:

Assume that i1 = 11% and i2 = 12%, and that k1 = 14.50% and k2 = 16.50%.What is the expected probability of repayment on the one-year corporate bonds in one year's time (round to two decimals)?

Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10% and a sudden change in the credit premium of 1% is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

The estimate of loan (or capital) risk (∆L) can be calculated as follows: DL * L * [∆R / (1+R)].

Which of the following statements is true?

By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.

Compensating balance is a proportion of:

The term disintermediation refers to the process in which firms access:

The key factors entering into the credit decision include:

Which of the following statements is true?

Consider the case of a simple one-period framework.If i = 12.30% and k = 13.87%, what is the risk premium on the corporate loan (round to two decimals)?

Models of credit risk measurement include:

Banks have been partially responsible for big corporate collapses such as Enron.

Assume the interest rate in the market for one-year zero-coupon government bonds is i = 7.5% and the rate for one-year zero-coupon grade BB bonds is k = 11.8%.What is the implied probability of default on the corporate bond (round to two decimals)?

Non-performing loans are loans characterised by some type of default-from non-payment to delays in payment of interest and/or principal.

Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.

What are the major ideas behind KMV's Credit Monitor model?

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 II: Loan Portfolio and Concentration 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

Assume that i₁ = 11% and i₂ = 12%, and that k₁ = 14.50% and k₂ = 16.50%.What is the expected probability of repayment on the one-year corporate bonds in one year's time (round to two decimals)?

The estimate of loan (or capital) risk (∆L) can be calculated as follows: D_L * L * [∆R / (1+R)].