Question 1

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 2

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 3

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 4

In the Moody's Analytics model, which of the following is a function of the historical returns of the individual assets.

Accepted Answer

A) The risk of a loan. 
B) The expected default frequency. 
C) The loss given default. 
D) The correlation of default risk. 
E) The volatility of the loan's default rate. 
A) The risk of a loan. 
B) The expected default frequency. 
C) The loss given default. 
D) The correlation of default risk. 
E) The volatility of the loan's default rate.

Question 5

Regina Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. Suppose Kansas Bank wants to ensure that its maximum loss on a secured (collateralized) loan is 10 percent (as a percent of capital). If it wishes to keep a concentration limit at 40 percent for secured loans, what is the estimated amount lost per dollar of defaulted secured loan?

Accepted Answer

A) 40 cents. 
B) 35 cents. 
C) 30 cents. 
D) 25 cents. 
E) 20 cents. 
A) 40 cents. 
B) 35 cents. 
C) 30 cents. 
D) 25 cents. 
E) 20 cents.

Question 6

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 7

Regina Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a % of capital) for secured loans made by this bank?

Accepted Answer

A) 10 percent. 
B) 20 percent. 
C) 33 percent. 
D) 40 percent. 
E) 50 percent. 
A) 10 percent. 
B) 20 percent. 
C) 33 percent. 
D) 40 percent. 
E) 50 percent.

Question 8

In models that are based on loan loss ratios, a β that is found to be less than one for a particular loan sector indicates that

Accepted Answer

A) the loans in that sector will soon be downgraded soon. 
B) the FI should increase its concentration in that loan sector due to the high rates of return. 
C) the loan losses in that sector are systematically lower relative to total loan losses. 
D) the FI should decrease its exposure to that sector because losses are higher than the rest of the portfolio 
E) the calculation is in error because β is restricted to be greater than one. 
A) the loans in that sector will soon be downgraded soon. 
B) the FI should increase its concentration in that loan sector due to the high rates of return. 
C) the loan losses in that sector are systematically lower relative to total loan losses. 
D) the FI should decrease its exposure to that sector because losses are higher than the rest of the portfolio 
E) the calculation is in error because β is restricted to be greater than one.

Question 9

On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of

Accepted Answer

A) 15 percent 
B) 25 percent 
C) 40 percent 
D) 45 percent 
E) 60 percent 
A) 15 percent 
B) 25 percent 
C) 40 percent 
D) 45 percent 
E) 60 percent

Question 10

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 11

OSFI policy for measuring credit concentration risk favours technical models over subjective analysis.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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

Question 15

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.

Question 16

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 17

Any model that seeks to estimate an efficient frontier for loans, and thus the optimal proportions in which to hold loans made to different borrowers, needs to determine and measure the

Accepted Answer

A) expected return on each loan to a borrower. 
B) risk of each loan made to a borrower. 
C) correlation of default risks between loans made to borrowers. 
D) expected return of the entire loan portfolio 
E) All of these. 
A) expected return on each loan to a borrower. 
B) risk of each loan made to a borrower. 
C) correlation of default risks between loans made to borrowers. 
D) expected return of the entire loan portfolio 
E) All of these.

Question 18

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 19

In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.

Accepted Answer

A) True 
 B)False

Question 20

If the amount lost per dollar on a defaulted loan is 40 percent, then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to

Accepted Answer

A) 5 percent. 
B) 15 percent. 
C) 25 percent. 
D) 30 percent. 
E) 50 percent. 
A) 5 percent. 
B) 15 percent. 
C) 25 percent. 
D) 30 percent. 
E) 50 percent.

Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

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

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.

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

In the Moody's Analytics model, which of the following is a function of the historical returns of the individual assets.

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?

In models that are based on loan loss ratios, a β that is found to be less than one for a particular loan sector indicates that

On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of

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

OSFI policy for measuring credit concentration risk favours technical models over subjective analysis.

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

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

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?

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

Any model that seeks to estimate an efficient frontier for loans, and thus the optimal proportions in which to hold loans made to different borrowers, needs to determine and measure the

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

In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.

If the amount lost per dollar on a defaulted loan is 40 percent, then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to

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