Question 1

Older loan pools provide very little evidence of credit risk to a particular sector when forming new loans of loans to that sector.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following observations concerning concentration limits is not true?

Accepted Answer

A) Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans. 
B) FIs set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) When two industry groups' performances are highly correlated, an FI may set an aggregate limit of less than the sum of the two individual industry limits. 
D) FIs may set aggregate portfolio limits or combinations of industry and geographic limits. 
E) Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital. 
A) Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans. 
B) FIs set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) When two industry groups' performances are highly correlated, an FI may set an aggregate limit of less than the sum of the two individual industry limits. 
D) FIs may set aggregate portfolio limits or combinations of industry and geographic limits. 
E) Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital.

Question 3

General diversification limits established by life and property and casualty insurance regulators are based on the concepts of modern portfolio theory.

Accepted Answer

A) True 
 B)False

Question 4

The all-in-spread (AIS) used in the Moody's Analytics model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.

Accepted Answer

A) True 
 B)False

Question 5

Modern portfolio theory models consider only how well diversified the entire loan portfolio is without regard to bonds that may be issued by sectors within the portfolio.

Accepted Answer

A) True 
 B)False

Question 6

Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?

Accepted Answer

A) CreditMetrics. 
B) Credit Risk +. 
C) Loan loss ratio-based model. 
D) KMV portfolio manager model. 
E) Loan volume-based model. 
A) CreditMetrics. 
B) Credit Risk +. 
C) Loan loss ratio-based model. 
D) KMV portfolio manager model. 
E) Loan volume-based model.

Question 7

Compared to modern portfolio theory, Moody's Analytics Portfolio Manager Model does not require loan returns to be normally distributed.

Accepted Answer

A) True 
 B)False

Question 8

If Bank A's average return on its loan portfolio is lower than that of Bank B's,

Accepted Answer

A) its risk-adjusted return is higher than Bank B's. 
B) its risk-adjusted return is lower than Bank B's. 
C) its standard deviation is lower than Bank B's. 
D) its standard deviation is higher than Bank B's. 
E) its risk-adjusted return is lower than Bank B's and its standard deviation is higher than Bank B's. [Refer to: 11-58] 
A) its risk-adjusted return is higher than Bank B's. 
B) its risk-adjusted return is lower than Bank B's. 
C) its standard deviation is lower than Bank B's. 
D) its standard deviation is higher than Bank B's. 
E) its risk-adjusted return is lower than Bank B's and its standard deviation is higher than Bank B's. [Refer to: 11-58]

Question 9

Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark?

Accepted Answer

A) CreditMetrics. 
B) Credit Risk +. 
C) Loan loss ratio-based model. 
D) Moody's Analytics portfolio manager model. 
E) Loan volume-based model. 
A) CreditMetrics. 
B) Credit Risk +. 
C) Loan loss ratio-based model. 
D) Moody's Analytics portfolio manager model. 
E) Loan volume-based model.

Question 10

What is Bank B's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook.

Accepted Answer

A) 14.16 percent. 
B) 33.33 percent. 
C) 5.66 percent. 
D) 3.00 percent. 
E) 1.50 percent. [Refer to: 11-58] 
A) 14.16 percent. 
B) 33.33 percent. 
C) 5.66 percent. 
D) 3.00 percent. 
E) 1.50 percent. [Refer to: 11-58]

Question 11

In the Moody's Analytics portfolio model, the expected return on a loan is the

Accepted Answer

A) annual all-in-spread minus the expected loss on the loan. 
B) annual all-in-spread minus expected probability of the borrower defaulting over the next year. 
C) annual all-in-spread minus the loss given default. 
D) the interest and fees paid by the borrower minus the interest paid by the FI to fund the loan. 
E) the interest and fees paid by the borrower minus the expected loss on the loan. 
A) annual all-in-spread minus the expected loss on the loan. 
B) annual all-in-spread minus expected probability of the borrower defaulting over the next year. 
C) annual all-in-spread minus the loss given default. 
D) the interest and fees paid by the borrower minus the interest paid by the FI to fund the loan. 
E) the interest and fees paid by the borrower minus the expected loss on the loan.

Question 12

According to Moody's Analytics, default correlations tend to be _____ and lie between _______.

Accepted Answer

A) Low; 0.002 and 0.15 
B) High; 1.86 and 2.99 
C) Low; 0.001 and 0.002 
D) High; 2.99 and 3.50 
E) Low; 0 and 0.001 
A) Low; 0.002 and 0.15 
B) High; 1.86 and 2.99 
C) Low; 0.001 and 0.002 
D) High; 2.99 and 3.50 
E) Low; 0 and 0.001

Question 13

A weakness of migration analysis to evaluate credit concentration risk is that the

Accepted Answer

A) information obtained for this analysis is usually ex-post (i.e.after the fact). 
B) information obtained for this analysis is ex-ante (i.e.before the fact). 
C) analysis makes use of historical data classified only by industries. 
D) analysis makes use of historical data classified by individual firms. 
E) migration of firms may only be temporary. 
A) information obtained for this analysis is usually ex-post (i.e.after the fact). 
B) information obtained for this analysis is ex-ante (i.e.before the fact). 
C) analysis makes use of historical data classified only by industries. 
D) analysis makes use of historical data classified by individual firms. 
E) migration of firms may only be temporary.

Question 14

Concentration limits are used to either reduce or increase exposure to specific industries.

Accepted Answer

A) True 
 B)False

Question 15

The return on a loan is measured by the so-called all-in-spread (AIS), which measures annual fees earned on the loan by the FI plus the annual spread between the loan rate paid by the borrower and the FI's costs of funds.

Accepted Answer

A) True 
 B)False

Question 16

If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?

Accepted Answer

A) 5 percent. 
B) 10 percent. 
C) 15 percent. 
D) 20 percent. 
E) 25 percent. 
A) 5 percent. 
B) 10 percent. 
C) 15 percent. 
D) 20 percent. 
E) 25 percent.

Question 17

Estimate the standard deviation of Bank B's asset allocation proportions relative to the national benchmark.

Accepted Answer

A) 40.44 percent. 
B) 34.32 percent. 
C) 29.89 percent. 
D) 21.21 percent. 
E) 15.00 percent. [Refer to: 11-66] 
A) 40.44 percent. 
B) 34.32 percent. 
C) 29.89 percent. 
D) 21.21 percent. 
E) 15.00 percent. [Refer to: 11-66]

Question 18

Migration analysis is not appropriate for an FI to use in the analysis of credit risk of consumer loans and credit card portfolios.

Accepted Answer

A) True 
 B)False

Question 19

Commercial bank call reports are provided by banks to the Federal Reserve and are useful in determining the proportion of loans in different classifications for the entire banking system.

Accepted Answer

A) True 
 B)False

Question 20

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 expected return on the loan using the Moody's Analytics model?

Accepted Answer

A) 6.50 percent. 
B) 5.50 percent. 
C) 6.00 percent. 
D) 14.0 percent. 
E) 13.5 percent. 
A) 6.50 percent. 
B) 5.50 percent. 
C) 6.00 percent. 
D) 14.0 percent. 
E) 13.5 percent.

Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

Older loan pools provide very little evidence of credit risk to a particular sector when forming new loans of loans to that sector.

Which of the following observations concerning concentration limits is not true?

General diversification limits established by life and property and casualty insurance regulators are based on the concepts of modern portfolio theory.

The all-in-spread (AIS) used in the Moody's Analytics model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.

Modern portfolio theory models consider only how well diversified the entire loan portfolio is without regard to bonds that may be issued by sectors within the portfolio.

Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?

Compared to modern portfolio theory, Moody's Analytics Portfolio Manager Model does not require loan returns to be normally distributed.

If Bank A's average return on its loan portfolio is lower than that of Bank B's,

Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark?

What is Bank B's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook.

In the Moody's Analytics portfolio model, the expected return on a loan is the

According to Moody's Analytics, default correlations tend to be _____ and lie between _______.

A weakness of migration analysis to evaluate credit concentration risk is that the

Concentration limits are used to either reduce or increase exposure to specific industries.

The return on a loan is measured by the so-called all-in-spread (AIS), which measures annual fees earned on the loan by the FI plus the annual spread between the loan rate paid by the borrower and the FI's costs of funds.

If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?

Estimate the standard deviation of Bank B's asset allocation proportions relative to the national benchmark.

Migration analysis is not appropriate for an FI to use in the analysis of credit risk of consumer loans and credit card portfolios.

Commercial bank call reports are provided by banks to the Federal Reserve and are useful in determining the proportion of loans in different classifications for the entire banking system.

Why Are Financial Institutions Special

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Interest Rate Risk I

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Credit Risk: Individual Loan Risk

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Liability and Liquidity Management

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Filters

According to Moody's Analytics, default correlations tend to be _ and lie between ___.