Question 1

All other things equal, longer term loans are more likely to be

Accepted Answer

A) variable-rate loans. 
B) fixed-rate loans. 
C) commitment loans. 
D) lowest risk category loans. 
E) high interest rate loans. 
A) variable-rate loans. 
B) fixed-rate loans. 
C) commitment loans. 
D) lowest risk category loans. 
E) high interest rate loans.

Question 2

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

Accepted Answer

A) Whether the borrower's capital structure is beyond the point where additional debt increases the probability of loss of principal or interest. 
B) Whether the relative level of interest rates will encourage the borrower to take excessive risks. 
C) Whether property can be pledged as collateral. 
D) Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk. 
E) Whether the record of the borrower is sufficient to create an implicit contract. 
A) Whether the borrower's capital structure is beyond the point where additional debt increases the probability of loss of principal or interest. 
B) Whether the relative level of interest rates will encourage the borrower to take excessive risks. 
C) Whether property can be pledged as collateral. 
D) Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk. 
E) Whether the record of the borrower is sufficient to create an implicit contract.

Question 3

The traditional duration equation can be used to measure the capital at risk on the loan.

Accepted Answer

A) True 
 B)False

Question 4

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm?

Accepted Answer

A) Less than 1. 
B) 1. 
C) Between 1 and 1.81. 
D) Between 1.81 and 2.99. 
E) Greater than 2.99. 
A) Less than 1. 
B) 1. 
C) Between 1 and 1.81. 
D) Between 1.81 and 2.99. 
E) Greater than 2.99.

Question 5

Borrower reputation is important in assessing credit quality because

Accepted Answer

A) good past payment performance perfectly predicts future behavior. 
B) preservation of a good customer/FI relationship acts as an additional incentive to encourage loan repayment. 
C) FIs only lend to customers they know. 
D) customers with poor credit histories always default on their loans. 
E) a reputation for honesty is important in credit appraisal. 
A) good past payment performance perfectly predicts future behavior. 
B) preservation of a good customer/FI relationship acts as an additional incentive to encourage loan repayment. 
C) FIs only lend to customers they know. 
D) customers with poor credit histories always default on their loans. 
E) a reputation for honesty is important in credit appraisal.

Question 6

Which of the following statements does NOT reflect credit decisions at the retail level?

Accepted Answer

A) Loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions. 
B) Most loan decisions at the retail level tend to be accept or reject decisions. 
C) Mortgage loans often are discriminated based on loan to price ratios rather than interest rates. 
D) Household borrowers require higher costs of information collection for lenders. 
E) Retail loans tend to be smaller than wholesale loans. 
A) Loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions. 
B) Most loan decisions at the retail level tend to be accept or reject decisions. 
C) Mortgage loans often are discriminated based on loan to price ratios rather than interest rates. 
D) Household borrowers require higher costs of information collection for lenders. 
E) Retail loans tend to be smaller than wholesale loans.

Question 7

Discriminant models often ignore hard-to-quantify factors in the credit decision.

Accepted Answer

A) True 
 B)False

Question 8

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually):   The cumulative probability of repayment of BBB corporate debt over the next two years is

Accepted Answer

A) 99.84 percent. 
B) 92.10 percent. 
C) 4.45 percent. 
D) 95.70 percent. 
E) 7.90 percent. 
A) 99.84 percent. 
B) 92.10 percent. 
C) 4.45 percent. 
D) 95.70 percent. 
E) 7.90 percent.

Question 9

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually):   Calculate the value of y (the implied forward rate on one-year maturity BBB corporate debt 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 10

RAROC is a measure of a firm's cost of debt.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Accepted Answer

A) the lower the current level of interest rates, the higher the RAROC. 
B) the lower the expected change in risk premium, the lower the RAROC. 
C) the higher the expected change in risk premium, the higher the RAROC. 
D) the higher the loan amount, the lower the RAROC. 
E) the lower the loan amount, the lower the RAROC. 
A) the lower the current level of interest rates, the higher the RAROC. 
B) the lower the expected change in risk premium, the lower the RAROC. 
C) the higher the expected change in risk premium, the higher the RAROC. 
D) the higher the loan amount, the lower the RAROC. 
E) the lower the loan amount, the lower the RAROC.

Question 12

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
According to Altman's credit scoring model, this firm should be considered

Accepted Answer

A) a high default risk firm. 
B) an indeterminant default risk firm. 
C) a low default risk firm. 
D) a lowest risk customer. 
E) Either a low default risk firm or a lowest risk customer. 
A) a high default risk firm. 
B) an indeterminant default risk firm. 
C) a low default risk firm. 
D) a lowest risk customer. 
E) Either a low default risk firm or a lowest risk customer.

All other things equal, longer term loans are more likely to be

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

The traditional duration equation can be used to measure the capital at risk on the loan.

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm?

Borrower reputation is important in assessing credit quality because

Which of the following statements does NOT reflect credit decisions at the retail level?

Discriminant models often ignore hard-to-quantify factors in the credit decision.

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): The cumulative probability of repayment of BBB corporate debt over the next two years is

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

RAROC is a measure of a firm's cost of debt.

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters

Exam 10: Credit Risk: Individual Loans

All other things equal, longer term loans are more likely to be

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

The traditional duration equation can be used to measure the capital at risk on the loan.

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm?

Borrower reputation is important in assessing credit quality because

Which of the following statements does NOT reflect credit decisions at the retail level?

Discriminant models often ignore hard-to-quantify factors in the credit decision.

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): The cumulative probability of repayment of BBB corporate debt over the next two years is

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

RAROC is a measure of a firm's cost of debt.

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters