Question 1

How would you interpret a Z-score of 2.25?

Accepted Answer

A) The Z-score lies within the 'safe' zone and thus a loan should be granted. 
B) The Z-score lies within the 'high default' zone and thus a loan should be granted. 
C) The Z-score lies within the 'zone of ignorance' and thus the borrower may or may not default. 
D) The interpretation of the Z-score is always dependent on an FI manager's subjective opinion. 
A) The Z-score lies within the 'safe' zone and thus a loan should be granted. 
B) The Z-score lies within the 'high default' zone and thus a loan should be granted. 
C) The Z-score lies within the 'zone of ignorance' and thus the borrower may or may not default. 
D) The interpretation of the Z-score is always dependent on an FI manager's subjective opinion.

Question 2

The term 'asset-backed loan' refers to a loan that is backed by a:

Accepted Answer

A) first claim on certain assets of the borrower if default occurs 
B) second claim on certain assets of the borrower at maturity 
C) first claim on certain assets of the borrower at maturity 
D) None of the listed options are correct. 
A) first claim on certain assets of the borrower if default occurs 
B) second claim on certain assets of the borrower at maturity 
C) first claim on certain assets of the borrower at maturity 
D) None of the listed options are correct.

Question 3

Unsecured loans are riskier than secured loans from the investor perspective.

Accepted Answer

A) True 
 B)False

Question 4

Assume that B = $200 000, r = 1 year, i = 7%, d = 0.9, N(h1) = 0.174120 and N(h2) = 0.793323.Using Moody's KMV Credit Monitor model, what is the required risk premium on the loan (round to two decimal places)?

Accepted Answer

A) 0.13% 
B) 0.91% 
C) 1.64% 
D) 6.30% 
A) 0.13% 
B) 0.91% 
C) 1.64% 
D) 6.30%

Question 5

Which of the following statements is false?

Accepted Answer

A) Default risk is the risk that the borrower is willing but unable to fulfil the terms promised under loan contract. 
B) Default risk is the risk that the borrower refinances the loan before maturity. 
C) Default risk is the risk that the borrower is able but unwilling to fulfil the terms promised under loan contract. 
D) Default risk is the risk that the borrower is unable and unwilling to fulfil the terms promised under loan contract. 
A) Default risk is the risk that the borrower is willing but unable to fulfil the terms promised under loan contract. 
B) Default risk is the risk that the borrower refinances the loan before maturity. 
C) Default risk is the risk that the borrower is able but unwilling to fulfil the terms promised under loan contract. 
D) Default risk is the risk that the borrower is unable and unwilling to fulfil the terms promised under loan contract.

Question 6

Which of the following statements is true?

Accepted Answer

A) A line of credit facility is a credit facility with a maximum size and a minimum period of time over which the borrower can withdraw funds. 
B) A line of credit facility is a credit facility with a minimum size and a minimum period of time over which the borrower can withdraw funds. 
C) A line of credit facility is a credit facility with a maximum size and a maximum period of time over which the borrower can withdraw funds. 
D) A line of credit facility is a credit facility with a minimum size and a maximum period of time over which the borrower can withdraw funds. 
A) A line of credit facility is a credit facility with a maximum size and a minimum period of time over which the borrower can withdraw funds. 
B) A line of credit facility is a credit facility with a minimum size and a minimum period of time over which the borrower can withdraw funds. 
C) A line of credit facility is a credit facility with a maximum size and a maximum period of time over which the borrower can withdraw funds. 
D) A line of credit facility is a credit facility with a minimum size and a maximum period of time over which the borrower can withdraw funds.

Question 7

Which of the following statements in relation to Altman's discriminant function is true?

Accepted Answer

A) The higher the Z-score the higher the probability of default. 
B) The loan size does not influence the result of the Altman Z-score model. 
C) The size of the borrower does not influence the result of the Altman Z-score model. 
D) The Altman Z-score model always produces an exact reject or accept decision. 
A) The higher the Z-score the higher the probability of default. 
B) The loan size does not influence the result of the Altman Z-score model. 
C) The size of the borrower does not influence the result of the Altman Z-score model. 
D) The Altman Z-score model always produces an exact reject or accept decision.

Question 8

Which of the following statements is true?

Accepted Answer

A) Borrower-specific factors are factors that affect all borrowers operating in the same industry. 
B) Market-specific factors are factors that are idiosyncratic factors arising from the market that affects single or a small number of borrowers. 
C) Market-specific factors carry a higher weight compared to borrower-specific factors when deciding on whether to accept or to reject a loan application. 
D) None of the listed options are correct. 
A) Borrower-specific factors are factors that affect all borrowers operating in the same industry. 
B) Market-specific factors are factors that are idiosyncratic factors arising from the market that affects single or a small number of borrowers. 
C) Market-specific factors carry a higher weight compared to borrower-specific factors when deciding on whether to accept or to reject a loan application. 
D) None of the listed options are correct.

Question 9

A credit line on which a borrower can both draw and repay many times over the life of the loan contract is called a:

Accepted Answer

A) reviving loan 
B) revolving loan 
C) refilling loan 
D) A credit line does not exist. 
A) reviving loan 
B) revolving loan 
C) refilling loan 
D) A credit line does not exist.

Question 10

Which of the following statements is true?

Accepted Answer

A) Cumulative default probability is the probability that a borrower will default over a specified multi-year period. 
B) Cumulative default probability is the probability that a borrower will default in any given year. 
C) Marginal default probability is the probability that a cluster of borrowers will default over a specified multi-year period. 
D) None of the listed options are correct. 
A) Cumulative default probability is the probability that a borrower will default over a specified multi-year period. 
B) Cumulative default probability is the probability that a borrower will default in any given year. 
C) Marginal default probability is the probability that a cluster of borrowers will default over a specified multi-year period. 
D) None of the listed options are correct.

Question 11

Mortality rates analyse historic default risk experience of bonds and loans of similar quality.

Accepted Answer

A) True 
 B)False

Question 12

Consider the case of a simple one-period framework.If i = 12.50%, k = 14.85%, p = 0.98, and g = 0.85 what is the required risk premium (round to two decimals)?

Accepted Answer

A) 0.34% 
B) 0.35% 
C) 0.98% 
D) 2.35% 
A) 0.34% 
B) 0.35% 
C) 0.98% 
D) 2.35%

Question 13

Default risk is the risk that the borrower is unable or unwilling to fulfil the terms promised under the loan contract.

Accepted Answer

A) True 
 B)False

Question 14

Explain the major concept of Altman's linear discriminant model.What would you consider to be the major disadvantages of this model?

Accepted Answer

Discriminant models divide borrowers int

Question 15

A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service its loans.

Accepted Answer

A) True 
 B)False

Question 16

The term 'loan rating' refers to the process of individual loans being given credit rating by:

Accepted Answer

A) rating agencies dependent on the lender's credit assessment 
B) rating agencies independent of the lender's credit assessment 
C) lenders dependent on a credit rating agency's credit assessment 
D) lenders independent of a credit rating agency's credit assessment 
A) rating agencies dependent on the lender's credit assessment 
B) rating agencies independent of the lender's credit assessment 
C) lenders dependent on a credit rating agency's credit assessment 
D) lenders independent of a credit rating agency's credit assessment

Question 17

Assume the interest rate in the market for one-year zero-coupon government bonds is i = 8% and the rate for one-year zero-coupon grade BBB bonds is k = 10.2%.What is the implied probability of repayment on the corporate bond (round to two decimals)?

Accepted Answer

A) 2.00% 
B) 2.04% 
C) 97.96% 
D) 98.00% 
A) 2.00% 
B) 2.04% 
C) 97.96% 
D) 98.00%

Question 18

Moody's KMV Credit Monitor model compares loans with option payoffs.

Accepted Answer

A) True 
 B)False

Question 19

...are restrictions written into bond and loan contracts either limiting or encouraging the borrower's actions that affect the probability of repayment.

Accepted Answer

A) Covenants 
B) Implicit contracts 
C) Credit rationings 
D) Options 
A) Covenants 
B) Implicit contracts 
C) Credit rationings 
D) Options

Question 20

Consider the following formula for calculating the contractually promised gross return on a loan k, per dollar lent: (1 + k) = 1 + [f + (BR + m)]/ {1 - [b(1 - R)]}.Which of the following statements is true?

Accepted Answer

A) The denominator is the promised gross cash inflow to the FI per dollar. 
B) The denominator reflects direct fees plus the loan interest rate consisting of both, the base lending rate and the credit risk premium. 
C) The formula ignores present value aspects. 
D) The FI's net benefit from requiring compensating balances must consider the benefits of holding additional non-interest bearing reserve requirements. 
A) The denominator is the promised gross cash inflow to the FI per dollar. 
B) The denominator reflects direct fees plus the loan interest rate consisting of both, the base lending rate and the credit risk premium. 
C) The formula ignores present value aspects. 
D) The FI's net benefit from requiring compensating balances must consider the benefits of holding additional non-interest bearing reserve requirements.

How would you interpret a Z-score of 2.25?

The term 'asset-backed loan' refers to a loan that is backed by a:

Unsecured loans are riskier than secured loans from the investor perspective.

Assume that B = $200 000, r = 1 year, i = 7%, d = 0.9, N(h₁) = 0.174120 and N(h₂) = 0.793323.Using Moody's KMV Credit Monitor model, what is the required risk premium on the loan (round to two decimal places)?

Which of the following statements is false?

Which of the following statements is true?

Which of the following statements in relation to Altman's discriminant function is true?

Which of the following statements is true?

A credit line on which a borrower can both draw and repay many times over the life of the loan contract is called a:

Which of the following statements is true?

Mortality rates analyse historic default risk experience of bonds and loans of similar quality.

Consider the case of a simple one-period framework.If i = 12.50%, k = 14.85%, p = 0.98, and g = 0.85 what is the required risk premium (round to two decimals)?

Default risk is the risk that the borrower is unable or unwilling to fulfil the terms promised under the loan contract.

Explain the major concept of Altman's linear discriminant model.What would you consider to be the major disadvantages of this model?

A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service its loans.

The term 'loan rating' refers to the process of individual loans being given credit rating by:

Assume the interest rate in the market for one-year zero-coupon government bonds is i = 8% and the rate for one-year zero-coupon grade BBB bonds is k = 10.2%.What is the implied probability of repayment on the corporate bond (round to two decimals)?

Moody's KMV Credit Monitor model compares loans with option payoffs.

...are restrictions written into bond and loan contracts either limiting or encouraging the borrower's actions that affect the probability of repayment.

Consider the following formula for calculating the contractually promised gross return on a loan k, per dollar lent: (1 + k) = 1 + [f + (BR + m)]/ {1 - [b(1 - R)]}.Which of the following statements is true?

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

How would you interpret a Z-score of 2.25?

The term 'asset-backed loan' refers to a loan that is backed by a:

Unsecured loans are riskier than secured loans from the investor perspective.

Assume that B = $200 000, r = 1 year, i = 7%, d = 0.9, N(h1) = 0.174120 and N(h2) = 0.793323.Using Moody's KMV Credit Monitor model, what is the required risk premium on the loan (round to two decimal places)?

Which of the following statements is false?

Which of the following statements is true?

Which of the following statements in relation to Altman's discriminant function is true?

Which of the following statements is true?

A credit line on which a borrower can both draw and repay many times over the life of the loan contract is called a:

Which of the following statements is true?

Mortality rates analyse historic default risk experience of bonds and loans of similar quality.

Consider the case of a simple one-period framework.If i = 12.50%, k = 14.85%, p = 0.98, and g = 0.85 what is the required risk premium (round to two decimals)?

Default risk is the risk that the borrower is unable or unwilling to fulfil the terms promised under the loan contract.

Explain the major concept of Altman's linear discriminant model.What would you consider to be the major disadvantages of this model?

A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service its loans.

The term 'loan rating' refers to the process of individual loans being given credit rating by:

Assume the interest rate in the market for one-year zero-coupon government bonds is i = 8% and the rate for one-year zero-coupon grade BBB bonds is k = 10.2%.What is the implied probability of repayment on the corporate bond (round to two decimals)?

Moody's KMV Credit Monitor model compares loans with option payoffs.

...are restrictions written into bond and loan contracts either limiting or encouraging the borrower's actions that affect the probability of repayment.

Consider the following formula for calculating the contractually promised gross return on a loan k, per dollar lent: (1 + k) = 1 + [f + (BR + m)]/ {1 - [b(1 - R)]}.Which of the following statements is true?

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 B = $200 000, r = 1 year, i = 7%, d = 0.9, N(h₁) = 0.174120 and N(h₂) = 0.793323.Using Moody's KMV Credit Monitor model, what is the required risk premium on the loan (round to two decimal places)?