Exam 10: Credit Risk: Individual Loans

Using a modified discriminant function similar to Altman's, Burger Bank estimates the following coefficients for its portfolio of loans: Z = 1.4X₁ + 1.09X₂ + 1.5X₃ Where X₁ = debt to asset ratio; X₂ = net income and X₃ = dividend payout ratio. What is the Z-score if the debt to asset ratio is 40 percent, net income is 12 percent, and the dividend payout ratio is 60 percent?

Unsecured debt is considered to be senior to secured debt.

Relationship pricing involves pricing for specific services which depend, in part, on the amount or number of services that are used by the customer.

How can discriminant analysis be used to make credit decisions?

One of the problems with estimating expected default rates is that the analysis is based on historic data.

The duration of a soon to be approved loan of $10 million is four years. The 99^th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent. If the fee income on this loan is 0.4 percent and the spread over the cost of funds to the bank is 1 percent, what is the expected income on this loan for the current year?

Revolving loans are credit lines

Which of the following is true of the prime lending rate?

Marginal default probability refers to the

The following represents two yield curves. What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate.)

Simulations by Moody's Analytics have shown which of the following models to be relatively better predictors of corporate failure and distress?

Variable rate mortgages have interest rates that adjust periodically according to the movement in some index.

Credit scoring models are advantageous because of their ability to sort borrowers into different default risk classes.

Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower?

Because of compensating balances and fees used to increase return on a loan, the credit risk premium is not the fundamental factor driving the promised return once the base rate on the loan has been set.

The condition of no arbitrage profits implies that profits cannot be made without taking some risk.

The marginal mortality rate is the probability of a bond or loan defaulting in any given year after it is issued.

The following information on the mortality rate of loans as estimated by an FI: If the cumulative mortality rate in year 3 is 3.46 percent for the B-rated loan, what is its yearly mortality rate in year 3?

Default by a large corporation is seldom a problem for FIs since these corporations have many different sources of borrowed funds.

Since their introduction, the proportion of variable-rate to fixed-rate residential mortgages has remained very stable over interest rate cycles.