Question 1

Which of the following is the correct definition of leverage?

Accepted Answer

A) Leverage is the ratio of equity to debt. 
B) Leverage is the ratio of assets to debt. 
C) Leverage is the ratio of debt to assets. 
D) Leverage is the ratio of debt to equity. 
A) Leverage is the ratio of equity to debt. 
B) Leverage is the ratio of assets to debt. 
C) Leverage is the ratio of debt to assets. 
D) Leverage is the ratio of debt to equity.

Question 2

A loan provided by a group of FIs as opposed to a single lender is called:

Accepted Answer

A) a joint loan 
B) project finance 
C) a syndicated loan 
D) a multiple loan 
A) a joint loan 
B) project finance 
C) a syndicated loan 
D) a multiple loan

Question 3

Explain the concept of RAROC and the major role RAROC models play in credit risk analysis.

Accepted Answer

The RAROC (risk-adjusted return on capit

Question 4

In the context of the KMV Credit Monitor Model, the market value of a risky loan made by a lender to a borrower can be expressed as:

Accepted Answer

A) F(r) = Be-i/r[(1/d)N(h1) + N(h2)] 
B) F(r) = Be-ir[(1/d)N(h1) + N(h2)] 
C) F(r) = Be-ir[(1/d)- N(h1) + N(h2)] 
D) F(r) = Be-ir[(1/d)N(h1) * N(h2)] 
A) F(r) = Be-i/r[(1/d)N(h1) + N(h2)] 
B) F(r) = Be-ir[(1/d)N(h1) + N(h2)] 
C) F(r) = Be-ir[(1/d)- N(h1) + N(h2)] 
D) F(r) = Be-ir[(1/d)N(h1) * N(h2)]

Question 5

Operational 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 6

Credit scoring models include:

Accepted Answer

A) linear probability models 
B) logit models 
C) linear discriminant analysis 
D) All of the listed options are correct. 
A) linear probability models 
B) logit models 
C) linear discriminant analysis 
D) All of the listed options are correct.

Question 7

Loan to value ratio is the:

Accepted Answer

A) loan amount divided by the book value of the property to be mortgaged 
B) loan amount divided by the perceived value of the property to be mortgaged 
C) investment amount divided by the appraised value of the property to be mortgaged 
D) loan amount divided by the appraised value of the property to be mortgaged 
A) loan amount divided by the book value of the property to be mortgaged 
B) loan amount divided by the perceived value of the property to be mortgaged 
C) investment amount divided by the appraised value of the property to be mortgaged 
D) loan amount divided by the appraised value of the property to be mortgaged

Question 8

Non-performing loans are loans:

Accepted Answer

A) given out to corporations with low credit ratings 
B) that require re-evaluating of credit terms after every six months 
C) characterised by some type of default-from non-payment to delays in payment of interest and/or principal 
D) None of the listed options are correct. 
A) given out to corporations with low credit ratings 
B) that require re-evaluating of credit terms after every six months 
C) characterised by some type of default-from non-payment to delays in payment of interest and/or principal 
D) None of the listed options are correct.

Question 9

A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default probability.

Accepted Answer

A) True 
 B)False

Question 10

The prime lending rate is the:

Accepted Answer

A) risk premium periodically set by the RBA 
B) base lending rate periodically set by banks 
C) base lending rate periodically set by the RBA 
D) risk premium periodically set by banks 
A) risk premium periodically set by the RBA 
B) base lending rate periodically set by banks 
C) base lending rate periodically set by the RBA 
D) risk premium periodically set by banks

Question 11

Which of the following statements is true?

Accepted Answer

A) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
B) Zero-coupon corporate bonds are bonds with semi-annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
C) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a small discount from face value. 
D) Zero-coupon corporate bonds are bonds with annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
A) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
B) Zero-coupon corporate bonds are bonds with semi-annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
C) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a small discount from face value. 
D) Zero-coupon corporate bonds are bonds with annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value.

Question 12

Which of the following statements is true?

Accepted Answer

A) RAROC is the risk-adjusted return on capital. 
B) RAROC is calculated as the capital at risk divided by the loan's income. 
C) RAROC should always be below an FI's RAROC benchmark as otherwise the FI increases its default risk exposure. 
D) None of the listed options are correct. 
A) RAROC is the risk-adjusted return on capital. 
B) RAROC is calculated as the capital at risk divided by the loan's income. 
C) RAROC should always be below an FI's RAROC benchmark as otherwise the FI increases its default risk exposure. 
D) None of the listed options are correct.

Question 13

Consider the following scenario: an FI charges a 0.5% loan origination fee and imposes a 10% 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 15% of deposits.What is the base lending rate if the credit risk premium is 3.055% and the ROA on the loan is 17%?

Accepted Answer

A) 11.5% 
B) 13.945% 
C) 12% 
D) 20.055% 
A) 11.5% 
B) 13.945% 
C) 12% 
D) 20.055%

Question 14

In its simplest form the rate on a loan is set as the base lending rate plus a credit risk premium.

Accepted Answer

A) True 
 B)False

Question 15

Credit card facilities are a revolving loan product.

Accepted Answer

A) True 
 B)False

Question 16

Using term structure derivation of credit risk on a one-year loan, it is possible to simply calculate the risk premium on the loan by deducting the market rate for a one-year zero-coupon government bond from the market rate for a one-year zero-coupon corporate bond of a credit rating equivalent to that of the prospective borrower.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is true?

Accepted Answer

A) Moody's KMV Credit Monitor model compares loans with the pay-off functions of swaps. 
B) Moody's KMV Credit Monitor model uses rating migrations data to calculate hypothetical loan values. 
C) Moody's KMV Credit Monitor model discriminates between two types of borrowers, that is, borrowers that are likely to default and borrowers that are unlikely to default. 
D) None of the listed options are correct. 
A) Moody's KMV Credit Monitor model compares loans with the pay-off functions of swaps. 
B) Moody's KMV Credit Monitor model uses rating migrations data to calculate hypothetical loan values. 
C) Moody's KMV Credit Monitor model discriminates between two types of borrowers, that is, borrowers that are likely to default and borrowers that are unlikely to default. 
D) None of the listed options are correct.

Question 18

...is a debt security issued by a corporation and sold to investors.

Accepted Answer

A) A corporate bond 
B) A company bond 
C) A firm bond 
D) A corporate paper 
A) A corporate bond 
B) A company bond 
C) A firm bond 
D) A corporate paper

Question 19

The current required yields on one- and two-year government bonds are i1 = 12% and i2 = 13%.What are the market's expectations of the one-year forward rate, f1 (round to two decimals)?

Accepted Answer

A) 13.50% 
B) 14.00% 
C) 14.50% 
D) 15.00% 
A) 13.50% 
B) 14.00% 
C) 14.50% 
D) 15.00%

Question 20

The linear probability model uses:

Accepted Answer

A) forecasted data, such as predicted future prices, as inputs into a model to explain repayment experience on old loans 
B) current indices, such as consumer price index, as inputs into a model to explain repayment experience on old loans 
C) past data, such as financial ratios, as inputs into a model to explain repayment experience on old loans 
D) None of the listed options are correct. 
A) forecasted data, such as predicted future prices, as inputs into a model to explain repayment experience on old loans 
B) current indices, such as consumer price index, as inputs into a model to explain repayment experience on old loans 
C) past data, such as financial ratios, as inputs into a model to explain repayment experience on old loans 
D) None of the listed options are correct.

Which of the following is the correct definition of leverage?

A loan provided by a group of FIs as opposed to a single lender is called:

Explain the concept of RAROC and the major role RAROC models play in credit risk analysis.

In the context of the KMV Credit Monitor Model, the market value of a risky loan made by a lender to a borrower can be expressed as:

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

Credit scoring models include:

Loan to value ratio is the:

Non-performing loans are loans:

A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default probability.

The prime lending rate is the:

Which of the following statements is true?

Which of the following statements is true?

In its simplest form the rate on a loan is set as the base lending rate plus a credit risk premium.

Credit card facilities are a revolving loan product.

Which of the following statements is true?

...is a debt security issued by a corporation and sold to investors.

The current required yields on one- and two-year government bonds are i₁ = 12% and i₂ = 13%.What are the market's expectations of the one-year forward rate, f₁ (round to two decimals)?

The linear probability model uses:

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

Which of the following is the correct definition of leverage?

A loan provided by a group of FIs as opposed to a single lender is called:

Explain the concept of RAROC and the major role RAROC models play in credit risk analysis.

In the context of the KMV Credit Monitor Model, the market value of a risky loan made by a lender to a borrower can be expressed as:

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

Credit scoring models include:

Loan to value ratio is the:

Non-performing loans are loans:

A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default probability.

The prime lending rate is the:

Which of the following statements is true?

Which of the following statements is true?

In its simplest form the rate on a loan is set as the base lending rate plus a credit risk premium.

Credit card facilities are a revolving loan product.

Which of the following statements is true?

...is a debt security issued by a corporation and sold to investors.

The current required yields on one- and two-year government bonds are i1 = 12% and i2 = 13%.What are the market's expectations of the one-year forward rate, f1 (round to two decimals)?

The linear probability model uses:

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

The current required yields on one- and two-year government bonds are i₁ = 12% and i₂ = 13%.What are the market's expectations of the one-year forward rate, f₁ (round to two decimals)?