Question 1

Which of the following statements is true?

Accepted Answer

A) An example of a covenant is a restriction that limits those actions of the borrower that have an impact on the probability of repayment. 
B) An example of a covenant is a restriction that encourages those actions of the borrower that have an impact on the probability of repayment. 
C) A covenant is a restriction written into either bond or loan contracts. 
D) All of the listed options are correct. 
A) An example of a covenant is a restriction that limits those actions of the borrower that have an impact on the probability of repayment. 
B) An example of a covenant is a restriction that encourages those actions of the borrower that have an impact on the probability of repayment. 
C) A covenant is a restriction written into either bond or loan contracts. 
D) All of the listed options are correct.

Question 2

Non-performing loans are loans with yield less than 5%.

Accepted Answer

A) True 
 B)False

Question 3

A corporate bond is:

Accepted Answer

A) a bond issued by governments and sold to corporations 
B) a bond hold by corporations 
C) a debt security issued by a corporation and sold to investors 
D) None of the listed options are correct. 
A) a bond issued by governments and sold to corporations 
B) a bond hold by corporations 
C) a debt security issued by a corporation and sold to investors 
D) None of the listed options are correct.

Question 4

Consider the following data of a prospective borrower. $$\begin{array} { | l | r | } 
\hline \text { Working capital } & \$ 50000 \
\hline \text { Total assets } & \$ 500000 \
\hline \text { Market value of equity } & \$ 40000 \
\hline \text { Book value of long-term debt } & \$ 360000 \
\hline \text { Retained earnings } & \$ 15000 \
\hline \text { EBIT } & \$ 250000 \
\hline \text { Sales revenue } & \$ 1000000 \
\hline
\end{array}$$ What is this company's Z-score (round to two decimals)?

Accepted Answer

A) 3.78 
B) 3.88 
C) 3.98 
D) 4.08 
A) 3.78 
B) 3.88 
C) 3.98 
D) 4.08

Question 5

Covenants 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) True 
 B)False

Question 6

Which of the following statements is true?

Accepted Answer

A) A commercial paper is an unsecured long-term debt instrument issued by corporations. 
B) A commercial paper is a secured long-term debt instrument issued by corporations. 
C) A commercial paper is a secured short-term debt instrument issued by corporations. 
D) A commercial paper is an unsecured short-term debt instrument issued by corporations. 
A) A commercial paper is an unsecured long-term debt instrument issued by corporations. 
B) A commercial paper is a secured long-term debt instrument issued by corporations. 
C) A commercial paper is a secured short-term debt instrument issued by corporations. 
D) A commercial paper is an unsecured short-term debt instrument issued by corporations.

Question 7

Consider the case of ABC Company.The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2.What is ABC Company's cumulative default probability (round to two decimals)?

Accepted Answer

A) 14.00% 
B) 11.00% 
C) 99.76% 
D) 10.76% 
A) 14.00% 
B) 11.00% 
C) 99.76% 
D) 10.76%

Question 8

Which of the following statements is true?

Accepted Answer

A) Marginal mortality rate is the historic default rate experience of a bond or loan. 
B) The mortality rate is the probability of a bond or loan defaulting over a specified multi-year period. 
C) Marginal mortality rate is the probability of a bond or loan defaulting in any given year of issue. 
D) Marginal mortality rate is the probability of a bond or loan defaulting over a specified multi-year period. 
A) Marginal mortality rate is the historic default rate experience of a bond or loan. 
B) The mortality rate is the probability of a bond or loan defaulting over a specified multi-year period. 
C) Marginal mortality rate is the probability of a bond or loan defaulting in any given year of issue. 
D) Marginal mortality rate is the probability of a bond or loan defaulting over a specified multi-year period.

Question 9

The zone of ignorance in the Altman Z-score model indicates that it is difficult to predict whether or not the prospective borrower will default in the future.

Accepted Answer

A) True 
 B)False

Question 10

An unsecured loan is also referred to as:

Accepted Answer

A) a non-asset backed loan 
B) mezzanine debt 
C) junior debt 
D) senior debt 
A) a non-asset backed loan 
B) mezzanine debt 
C) junior debt 
D) senior debt

Question 11

The position of the business cycle in the economy is not important in assessing the default probability of a borrower.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is true?

Accepted Answer

A) Credit rationing means that the FI restricts the quantity of loans made available to an individual borrower. 
B) Credit rationing means that the FI restricts the type of loans made available to an individual borrower. 
C) Credit rationing means that the FI restricts the quality of loans made available to an individual borrower. 
D) Credit rationing means that the FI does not have sufficient funds available for lending and thus only grants loans to selected borrowers. 
A) Credit rationing means that the FI restricts the quantity of loans made available to an individual borrower. 
B) Credit rationing means that the FI restricts the type of loans made available to an individual borrower. 
C) Credit rationing means that the FI restricts the quality of loans made available to an individual borrower. 
D) Credit rationing means that the FI does not have sufficient funds available for lending and thus only grants loans to selected borrowers.

Question 13

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 current market value of the loan (round to two decimals)?

Accepted Answer

A) $184 015.32 
B) $186 478.64 
C) $200 000.00 
D) $214 000.00 
A) $184 015.32 
B) $186 478.64 
C) $200 000.00 
D) $214 000.00

Question 14

Assume that there are two factors influencing the past default behaviour of borrowers, these being the debt to equity ratio and the sales to assets ratio.Based on past default (repayment) experience, the linear probability model is estimated as Zi = 0.3(D/Ei) + 0.15 (S/Ai).Assume that a prospective borrower has a D/E ratio of 0.9 and a sales to assets ratio of 2.5.What is the borrower's probability of default?

Accepted Answer

A) 0.885 
B) 0.645 
C) 0.45 
D) 3.4 
A) 0.885 
B) 0.645 
C) 0.45 
D) 3.4

Question 15

Assume that f1 = 13.50% and c1 = 17.40%.Which of the following statements is true?

Accepted Answer

A) The expected default probability of repayment is 96.10%. 
B) The expected probability of repayment is 3.32%. 
C) The one-year rate expected on corporate securities one year into the future is 13.50%. 
D) The current one-year rate on corporate securities is 17.40%. 
A) The expected default probability of repayment is 96.10%. 
B) The expected probability of repayment is 3.32%. 
C) The one-year rate expected on corporate securities one year into the future is 13.50%. 
D) The current one-year rate on corporate securities is 17.40%.

Which of the following statements is true?

Non-performing loans are loans with yield less than 5%.

A corporate bond is:

Consider the following data of a prospective borrower. Working capital \ 50000 Total assets \ 500000 Market value of equity \ 40000 Book value of long-term debt \ 360000 Retained earnings \ 15000 EBIT \ 250000 Sales revenue \ 1000000 What is this company's Z-score (round to two decimals)?

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

Which of the following statements is true?

Consider the case of ABC Company.The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2.What is ABC Company's cumulative default probability (round to two decimals)?

Which of the following statements is true?

The zone of ignorance in the Altman Z-score model indicates that it is difficult to predict whether or not the prospective borrower will default in the future.

An unsecured loan is also referred to as:

The position of the business cycle in the economy is not important in assessing the default probability of a borrower.

Which of the following statements is true?

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 current market value of the loan (round to two decimals)?

Assume that f₁ = 13.50% and c₁ = 17.40%.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

Which of the following statements is true?

Non-performing loans are loans with yield less than 5%.

A corporate bond is:

Consider the following data of a prospective borrower. Working capital \ 50000 Total assets \ 500000 Market value of equity \ 40000 Book value of long-term debt \ 360000 Retained earnings \ 15000 EBIT \ 250000 Sales revenue \ 1000000 What is this company's Z-score (round to two decimals)?

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

Which of the following statements is true?

Consider the case of ABC Company.The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2.What is ABC Company's cumulative default probability (round to two decimals)?

Which of the following statements is true?

The zone of ignorance in the Altman Z-score model indicates that it is difficult to predict whether or not the prospective borrower will default in the future.

An unsecured loan is also referred to as:

The position of the business cycle in the economy is not important in assessing the default probability of a borrower.

Which of the following statements is true?

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 current market value of the loan (round to two decimals)?

Assume that f1 = 13.50% and c1 = 17.40%.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 current market value of the loan (round to two decimals)?

Assume that f₁ = 13.50% and c₁ = 17.40%.Which of the following statements is true?