Question 1

In the Moody's Analytics portfolio model, the risk of a loan measures

Accepted Answer

A) the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. 
B) annual all-in-spread minus the loss given default. 
C) annual all-in-spread minus the expected default frequency. 
D) the product of the expected default frequency and the estimated loss given default. 
E) the volatility of the loan's default rate around its expected value times the amount lost given default. 
A) the product of the estimated loss given default and risk-free rate on a security of equivalent maturity. 
B) annual all-in-spread minus the loss given default. 
C) annual all-in-spread minus the expected default frequency. 
D) the product of the expected default frequency and the estimated loss given default. 
E) the volatility of the loan's default rate around its expected value times the amount lost given default. E

Question 2

Matrix Bank has compiled the following migration matrix on consumer loans.Which of the following statements accurately summarizes this data?

Accepted Answer

A) Ten percent of grade two loans were upgraded during the year. 
B) Grade one loans have a higher probability of downgrade than grades two or three. 
C) Grade three loans have a higher probability of upgrade than grade two loans. 
D) Grade three loans have a higher probability of downgrade than grade two loans. 
E) All of the options. 
A) Ten percent of grade two loans were upgraded during the year. 
B) Grade one loans have a higher probability of downgrade than grades two or three. 
C) Grade three loans have a higher probability of upgrade than grade two loans. 
D) Grade three loans have a higher probability of downgrade than grade two loans. 
E) All of the options. E

Question 3

In 1994, The Federal Reserve Board ruled against a proposal to use quantitative models to assess credit concentration risk because

Accepted Answer

A) current methods to identify concentration risk were not sufficiently advanced. 
B) there was no public data on default rates on publicly traded bonds. 
C) there was sufficient information on commercial loan defaults for banks to perform in-house analysis. 
D) problems related to credit concentration risk have been minimal for U.S.banks. 
E) there was already a law that requires banks to set aside capital to compensate for credit concentration risk. 
A) current methods to identify concentration risk were not sufficiently advanced. 
B) there was no public data on default rates on publicly traded bonds. 
C) there was sufficient information on commercial loan defaults for banks to perform in-house analysis. 
D) problems related to credit concentration risk have been minimal for U.S.banks. 
E) there was already a law that requires banks to set aside capital to compensate for credit concentration risk. A

Question 4

A loan migration matrix is a measure of the probability of a loan being upgraded, downgraded, or defaulting over some period.

Accepted Answer

A) True 
 B)False

Question 5

The expected return of a portfolio of loans is equal to the weighted average of the expected returns of the individual loans.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?

Accepted Answer

A) Migration analysis. 
B) Concentration limits. 
C) Loan loss ratio-based model. 
D) Moody's Analytics portfolio manager model. 
E) Loan volume-based model. 
A) Migration analysis. 
B) Concentration limits. 
C) Loan loss ratio-based model. 
D) Moody's Analytics portfolio manager model. 
E) Loan volume-based model.

Question 7

The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is a source of loan volume data?

Accepted Answer

A) Commercial bank call reports. 
B) Data on shared national credits. 
C) Commercial databases. 
D) All of the options. 
E) Only the Federal Reserve has this data. 
A) Commercial bank call reports. 
B) Data on shared national credits. 
C) Commercial databases. 
D) All of the options. 
E) Only the Federal Reserve has this data.

Question 9

The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

Accepted Answer

A) True 
 B)False

Question 10

In the past, data availability limited the use of sophisticated portfolio models to set concentration limits within lending to particular industries.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk.

Accepted Answer

A) The Bank Holding Company Act (1956). 
B) FDIC Improvement Act (1991). 
C) Depository Institutions Deregulation and Monetary Control Act (1980). 
D) Garn-St.Germain Depository Institutions Act (1982). 
E) Financial Institutions Reform Recovery and Enforcement Act (1989). 
A) The Bank Holding Company Act (1956). 
B) FDIC Improvement Act (1991). 
C) Depository Institutions Deregulation and Monetary Control Act (1980). 
D) Garn-St.Germain Depository Institutions Act (1982). 
E) Financial Institutions Reform Recovery and Enforcement Act (1989).

Question 12

Use the following information to answer questions 53-55: $$\begin{array} { l l l l } 
& \text { National Banks } & \text { Bank A } & \text { Bank B } \
\text { Real Estate Loans } & 60 \text { percent } & 30 \text { percent } & 56 \text { percent } \
\text { Consumer Loans } & 20 \text { percent } & 30 \text { percent } & 28 \text { percent } \
\text { Commercial Loans } & 20 \text { percent } & 10 \text { percent } & 16 \text { percent }
\end{array}$$ [Reference 11-53]
-What is Bank A's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook.

Accepted Answer

A) 7.23 percent. 
B) 10.89 percent. 
C) 18.71 percent. 
D) 19.15 percent. 
E) 27.36 percent. [Refer to: 11-58] 
A) 7.23 percent. 
B) 10.89 percent. 
C) 18.71 percent. 
D) 19.15 percent. 
E) 27.36 percent. [Refer to: 11-58]

Question 13

LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan.The bank also charged $100,000 in fees to originate the loan.The bank has a cost of funds of 8 percent.The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest. What is the risk of the loan using the Moody's Analytics model?

Accepted Answer

A) 4.75 percent. 
B) 0.48 percent. 
C) 6.89 percent. 
D) 2.18 percent. 
E) 1.50 percent. 
A) 4.75 percent. 
B) 0.48 percent. 
C) 6.89 percent. 
D) 2.18 percent. 
E) 1.50 percent.

Question 14

If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?

Accepted Answer

A) 20 percent. 
B) 30 percent. 
C) 40 percent. 
D) 50 percent. 
E) 60 percent. 
A) 20 percent. 
B) 30 percent. 
C) 40 percent. 
D) 50 percent. 
E) 60 percent.

Question 15

A disadvantage to modern portfolio theory (MPT) is that small institutions generally hold significant amounts of regionally specific and illiquid loans.

Accepted Answer

A) True 
 B)False

Question 16

What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated (ρ = 0)?

Accepted Answer

A) 1.41 percent. 
B) 1.63 percent. 
C) 0.93 percent. 
D) 3.57 percent. 
E) 1.18 percent. 
A) 1.41 percent. 
B) 1.63 percent. 
C) 0.93 percent. 
D) 3.57 percent. 
E) 1.18 percent.

Question 17

A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT

Accepted Answer

A) rating at which the portfolio ended the year. 
B) transition probabilities. 
C) rating at which the portfolio of loans began the year. 
D) future migration expected in the portfolio. 
E) the average proportions of loans that began the year. 
A) rating at which the portfolio ended the year. 
B) transition probabilities. 
C) rating at which the portfolio of loans began the year. 
D) future migration expected in the portfolio. 
E) the average proportions of loans that began the year.

Question 18

Migration analysis is a tool to measure credit concentration risk and refers to

Accepted Answer

A) the identification of problem loans in sectors by observing periodic migration of industries. 
B) the identification of credit concentration by observing trends in market borrowing by different sectors of the industry. 
C) the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies. 
D) the identification of borrowing patterns such as long or short term debt by different sectors of industry. 
E) the identification of shifts in debt/asset ratios of firms in specific industries. 
A) the identification of problem loans in sectors by observing periodic migration of industries. 
B) the identification of credit concentration by observing trends in market borrowing by different sectors of the industry. 
C) the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies. 
D) the identification of borrowing patterns such as long or short term debt by different sectors of industry. 
E) the identification of shifts in debt/asset ratios of firms in specific industries.

Question 19

Which of the following is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio?

Accepted Answer

A) Loss rate. 
B) Systematic loan loss risk. 
C) Concentration limit. 
D) Loss given default. 
E) Expected default frequency. 
A) Loss rate. 
B) Systematic loan loss risk. 
C) Concentration limit. 
D) Loss given default. 
E) Expected default frequency.

Question 20

The risk of the loan reflects the volatility of the loan's default rate around its expected value divided by the amount lost given default.

Accepted Answer

A) True 
 B)False

Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

In the Moody's Analytics portfolio model, the risk of a loan measures

Matrix Bank has compiled the following migration matrix on consumer loans.Which of the following statements accurately summarizes this data?

In 1994, The Federal Reserve Board ruled against a proposal to use quantitative models to assess credit concentration risk because

A loan migration matrix is a measure of the probability of a loan being upgraded, downgraded, or defaulting over some period.

The expected return of a portfolio of loans is equal to the weighted average of the expected returns of the individual loans.

Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?

The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.

Which of the following is a source of loan volume data?

The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

In the past, data availability limited the use of sophisticated portfolio models to set concentration limits within lending to particular industries.

Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk.

If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?

A disadvantage to modern portfolio theory (MPT) is that small institutions generally hold significant amounts of regionally specific and illiquid loans.

What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated (ρ = 0)?

A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT

Migration analysis is a tool to measure credit concentration risk and refers to

Which of the following is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio?

The risk of the loan reflects the volatility of the loan's default rate around its expected value divided by the amount lost given default.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters