Question 1

Which of the following observations is true of a spot loan?

Accepted Answer

A) It involves a maximum size and a maximum period of time over which the borrower can withdraw funds. 
B) It involves immediate withdrawal of the entire loan amount by the borrower. 
C) It is an unsecured short-term debt instrument issued by corporations. 
D) It is a nonbank loan substitute. 
E) It is a line of credit. 
A) It involves a maximum size and a maximum period of time over which the borrower can withdraw funds. 
B) It involves immediate withdrawal of the entire loan amount by the borrower. 
C) It is an unsecured short-term debt instrument issued by corporations. 
D) It is a nonbank loan substitute. 
E) It is a line of credit.

Question 2

Recessionary phases in the business cycle typically cause greater hardship on companies that borrow large amounts.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?

Accepted Answer

A) Reputation is an implicit contract regarding borrowing and repayment that extends beyond the formal explicit legal contract. 
B) A borrower's leverage ratio is positively related to the probability of default over all levels of debt. 
C) Firms with high earnings variance are less attractive credit risks than those firms that have a history of stable earnings. 
D) Loans can be collateralized or uncollateralized. 
E) Reputation is a key reason why initial public offering of debt securities by small firms have a higher interest rate than do debt issues of more seasoned borrowers. 
A) Reputation is an implicit contract regarding borrowing and repayment that extends beyond the formal explicit legal contract. 
B) A borrower's leverage ratio is positively related to the probability of default over all levels of debt. 
C) Firms with high earnings variance are less attractive credit risks than those firms that have a history of stable earnings. 
D) Loans can be collateralized or uncollateralized. 
E) Reputation is a key reason why initial public offering of debt securities by small firms have a higher interest rate than do debt issues of more seasoned borrowers.

Question 4

If the spot interest rate on a prime-rated one-month CD is 6 percent today and the market rate on a two-month maturity prime-rated CD is 7 percent today, the implied forward rate on a one-month CD to be delivered one month from today is

Accepted Answer

A) 9 percent. 
B) 11 percent. 
C) 18 percent. 
D) 10 percent. 
E) 8 percent. 
A) 9 percent. 
B) 11 percent. 
C) 18 percent. 
D) 10 percent. 
E) 8 percent.

Question 5

The primary difficulty in arranging a syndicated loan is having all of the various lending and borrowing parties reach agreement on terms, rates, and collateral.

Accepted Answer

A) True 
 B)False

Question 6

Usury ceilings are maximum rates imposed by legislation that FIs can charge on consumer and mortgage debt.

Accepted Answer

A) True 
 B)False

Question 7

What is the most important factor determining bankruptcy, according to the Altman Z-score model?

Accepted Answer

A) Working capital to assets ratio. 
B) Retained earnings to assets ratio. 
C) Earnings before interest and taxes to assets ratio. 
D) Market value of equity to book value of long-term debt ratio. 
E) Sales to assets ratio. 
A) Working capital to assets ratio. 
B) Retained earnings to assets ratio. 
C) Earnings before interest and taxes to assets ratio. 
D) Market value of equity to book value of long-term debt ratio. 
E) Sales to assets ratio.

Question 8

The mortality rate is the past default experience of all loans, regardless of quality.

Accepted Answer

A) True 
 B)False

Question 9

Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution, the actual return to the lender on the usable portion of these loans is higher.

Accepted Answer

A) True 
 B)False

Question 10

The following represents two yield curves.   What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year?

Accepted Answer

A) 3.00 percent. 
B) 5.06 percent. 
C) 4.00 percent. 
D) 5.00 percent. 
E) 7.00 percent. 
A) 3.00 percent. 
B) 5.06 percent. 
C) 4.00 percent. 
D) 5.00 percent. 
E) 7.00 percent.

Question 11

Which of the following is NOT a valid conceptual or application problem of the mortality rate approach to estimate default risk?

Accepted Answer

A) Implied future probabilities are sensitive to the period over which MMRs are calculated. 
B) The estimates are sensitive to the number of issues in each investment grade. 
C) Syndicated loans seem to have higher mortality rates than corporate bonds. 
D) The estimated probability values are historic or backward-looking measures. 
E) The estimates are sensitive to the relative size of issues in each investment grade. 
A) Implied future probabilities are sensitive to the period over which MMRs are calculated. 
B) The estimates are sensitive to the number of issues in each investment grade. 
C) Syndicated loans seem to have higher mortality rates than corporate bonds. 
D) The estimated probability values are historic or backward-looking measures. 
E) The estimates are sensitive to the relative size of issues in each investment grade.

Question 12

What does the Moody's Analytics model use as equivalent to holding a call option on the assets of the firm?

Accepted Answer

A) The value of equity in a firm. 
B) Total liabilities of a firm. 
C) Net income of a firm. 
D) Dividend yield of investments. 
E) Short-term debt liabilities of a firm. 
A) The value of equity in a firm. 
B) Total liabilities of a firm. 
C) Net income of a firm. 
D) Dividend yield of investments. 
E) Short-term debt liabilities of a firm.

Question 13

Which of the following is not a qualitative factor in credit risk analysis?

Accepted Answer

A) Borrower reputation. 
B) Borrower ethnic origin. 
C) Leverage position of the borrower. 
D) The level of interest rates. 
E) Collateral available. 
A) Borrower reputation. 
B) Borrower ethnic origin. 
C) Leverage position of the borrower. 
D) The level of interest rates. 
E) Collateral available.

Question 14

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually):   Using the term structure of default probabilities, the implied default probability for BBB corporate debt during the current year is

Accepted Answer

A) 98.0 percent. 
B) 2.35 percent. 
C) 4.19 percent. 
D) 3.90 percent. 
E) 2.71 percent. 
A) 98.0 percent. 
B) 2.35 percent. 
C) 4.19 percent. 
D) 3.90 percent. 
E) 2.71 percent.

Question 15

Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and not by credit rationing.

Accepted Answer

A) True 
 B)False

Question 16

The duration of a soon to be approved loan of $10 million is four years. The 99th 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 minimum RAROC acceptable to the bank is 8 percent, what should be its expected percentage fee income in order for it to approve the loan?

Accepted Answer

A) .157 percent. 
B) .331 percent. 
C) .471 percent. 
D) .531 percent. 
E) .571 percent. 
A) .157 percent. 
B) .331 percent. 
C) .471 percent. 
D) .531 percent. 
E) .571 percent.

Question 17

The probability that a borrower would default in any specific time period is a marginal default probability.

Accepted Answer

A) True 
 B)False

Question 18

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually):   Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year).

Accepted Answer

A) 6.53 percent. 
B) 10.83 percent. 
C) 5.75 percent. 
D) 6.925 percent. 
E) 1.017 percent. 
A) 6.53 percent. 
B) 10.83 percent. 
C) 5.75 percent. 
D) 6.925 percent. 
E) 1.017 percent.

Question 19

LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the domestic money-center bank market.

Accepted Answer

A) True 
 B)False

Question 20

Credit risk applies only to bond investment and loan portfolios of FIs and banks.

Accepted Answer

A) True 
 B)False

Exam 10: Credit Risk: Individual Loans

Which of the following observations is true of a spot loan?

Recessionary phases in the business cycle typically cause greater hardship on companies that borrow large amounts.

Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?

If the spot interest rate on a prime-rated one-month CD is 6 percent today and the market rate on a two-month maturity prime-rated CD is 7 percent today, the implied forward rate on a one-month CD to be delivered one month from today is

The primary difficulty in arranging a syndicated loan is having all of the various lending and borrowing parties reach agreement on terms, rates, and collateral.

Usury ceilings are maximum rates imposed by legislation that FIs can charge on consumer and mortgage debt.

What is the most important factor determining bankruptcy, according to the Altman Z-score model?

The mortality rate is the past default experience of all loans, regardless of quality.

Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution, the actual return to the lender on the usable portion of these loans is higher.

The following represents two yield curves. What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year?

Which of the following is NOT a valid conceptual or application problem of the mortality rate approach to estimate default risk?

What does the Moody's Analytics model use as equivalent to holding a call option on the assets of the firm?

Which of the following is not a qualitative factor in credit risk analysis?

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): Using the term structure of default probabilities, the implied default probability for BBB corporate debt during the current year is

Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and not by credit rationing.

The probability that a borrower would default in any specific time period is a marginal default probability.

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year).

LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the domestic money-center bank market.

Credit risk applies only to bond investment and loan portfolios of FIs and banks.

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