Exam 10: Credit Risk: Individual Loans

Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers. Based on past default (repayment) experience, the linear probability model is estimated as: PD_i = 0.5(D/E_i) + 0.1(S/A_i). If a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the expected probability of default is

The amount of leverage of a borrower and the probability of default are positively related, but only after some minimum level of debt.

Commercial loans have been decreasing in importance in bank loan portfolios.

A loan commitment is an agreement involving the amount of loan available and the amount of time during which the loan can be initiated.

The following information on the mortality rate of loans as estimated by an FI: What is the cumulative mortality rate of the A-rated and B-rated loans for year 2?

Credit rationing is a form of managing credit risk.

Which of the following factors may affect the promised return an FI receives on a loan?

Use the following information and the option valuation model for the next two problems. Onyx Corporation has a $200,000 loan that will mature in one year. The risk free interest rate is 6 percent. The standard deviation in the rate of change in the underlying asset's value is 12 percent, and the leverage ratio for Onyx is 0.8 (80 percent). The value for N(h1) is 0.02743, and the value for N(h2) is 0.96406. What is the current market value of the loan?

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. Using Z = 1.682 as the cut-off rate, what should be the debt to asset ratio of the firm in order for the bank to approve the loan?

From the lender's point of view, debt can be evaluated as

Which of the following refers to the term "mortality rate"?

Willingness to post collateral may be a signal of more rather than less credit risk on the part of the borrower.

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = 0.30 X₂ = 0 X₃ = -0.30 X₄ = 0.15 X₅ = 2.1 Altman's discriminant function takes the form: Z = 1.2 X₁ + 1.4 X₂ + 3.3 X₃ + 0.6 X₄ + 1.0 X₅ The Z score for the firm would be

Which of the following is true of commercial paper?

Residential mortgages are the smallest component of bank real estate loan portfolios.

The cumulative default probability of a borrower in a given time period is one minus the product of the marginal default probabilities for all time periods up to that time period.

Use the following information and the option valuation model for the next two problems. Onyx Corporation has a $200,000 loan that will mature in one year. The risk free interest rate is 6 percent. The standard deviation in the rate of change in the underlying asset's value is 12 percent, and the leverage ratio for Onyx is 0.8 (80 percent). The value for N(h1) is 0.02743, and the value for N(h2) is 0.96406. What is the required yield on this risky loan?

In making credit decisions, which of the following items is considered a market-specific factor?

At some point, further increases in interest rates on specific loans may decrease expected loan returns because of increased probability of default by the borrower.

From the perspective of an FI, which of the following is an advantage of a floating-rate loan?