Question 1

Which of the following statements is true?

Accepted Answer

A) Partial applications of portfolio theory include loan volume based models and loan loss ratio based models. 
B) Partial applications of portfolio theory include loan portfolio profitability based models and regulatory models. 
C) Partial applications of portfolio theory include loan volume based models, loan loss ratio based models and regulatory models. 
D) Partial applications of portfolio theory include loan portfolio profitability based models and loan loss minimisation based models. 
A) Partial applications of portfolio theory include loan volume based models and loan loss ratio based models. 
B) Partial applications of portfolio theory include loan portfolio profitability based models and regulatory models. 
C) Partial applications of portfolio theory include loan volume based models, loan loss ratio based models and regulatory models. 
D) Partial applications of portfolio theory include loan portfolio profitability based models and loan loss minimisation based models. A

Question 2

Consider the following table with information on the weightings and expected returns of three assets held by an FI.   What is the expected return on the portfolio (round to two decimals)?

Accepted Answer

A) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) / 3 = 4.07% 
B) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) * 3 = 36.66% 
C) 0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75 = 12.22% 
D) (12.35 + 10.25 + 15.75) / 3 = 12.78% 
A) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) / 3 = 4.07% 
B) (0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75) * 3 = 36.66% 
C) 0.15 * 12.35 + 0.55 * 10.25 + 0.30 * 15.75 = 12.22% 
D) (12.35 + 10.25 + 15.75) / 3 = 12.78% C

Question 3

The concentration limit for a loan portfolio is calculated as the expected default frequency of the borrower multiplied by (one divided by the loss rate).

Accepted Answer

A) True 
 B)False  True

Question 4

Consider the following portfolio of assets:
 
 What is the variance of the portfolio (round to two decimals)?

Accepted Answer

A) (0.45)S1U1P12S1S1P0(36.60%) + (0.55)S1U1P12S1S1P0(76.56%) + (0.45)(0.55)(-0.2) * (6.05%)(8.75%) = 27.95 
B) (0.45)S1U1P12S1S1P0(36.60%) + (0.55)S1U1P12S1S1P0(76.56%) + 2(0.45)(0.55)(-0.2) *  (6.05%) (8.75%) = 25.33 
C) (0.45)(36.60%) + (0.55)(76.56%) + 2(0.45)S1U1P12S1S1P0(0.55) 
D) (-.2) *(6.05%)(8.75%) = 57.28 
E) (0.45)(36.60%) + (0.55)(76.56%) + 2(0.45)(0.55)(-0.2) * (6.05%)(8.75%) = 53.34S1S1P0 
A) (0.45)S1U1P12S1S1P0(36.60%) + (0.55)S1U1P12S1S1P0(76.56%) + (0.45)(0.55)(-0.2) * (6.05%)(8.75%) = 27.95 
B) (0.45)S1U1P12S1S1P0(36.60%) + (0.55)S1U1P12S1S1P0(76.56%) + 2(0.45)(0.55)(-0.2) *  (6.05%) (8.75%) = 25.33 
C) (0.45)(36.60%) + (0.55)(76.56%) + 2(0.45)S1U1P12S1S1P0(0.55) 
D) (-.2) *(6.05%)(8.75%) = 57.28 
E) (0.45)(36.60%) + (0.55)(76.56%) + 2(0.45)(0.55)(-0.2) * (6.05%)(8.75%) = 53.34S1S1P0

Question 5

Assume that an FI's concentration limit on a particular sector is 15 per cent and that the sector's loss rate is 25 per cent.What is the maximum loss as a percentage of the FI's capital (round to two decimals)?

Accepted Answer

A) 1.67 per cent 
B) 0.60 per cent 
C) 10.00 per cent 
D) 3.75 per cent 
A) 1.67 per cent 
B) 0.60 per cent 
C) 10.00 per cent 
D) 3.75 per cent

Question 6

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Accepted Answer

The answer of Loan loss ratio based models estimate systematic...

Question 7

Which of the following statements is true?

Accepted Answer

A) Loan loss ratio based models rely on actual data and involve the estimation of the systematic loan loss risk of a particular industry relative to the loan loss risk of an FI's total loan portfolio. 
B) Loan loss ratio based models rely on historic data and involve the estimation of the systematic loan loss risk of a particular industry relative to the loan loss risk of an FI's total loan portfolio. 
C) Loan loss ratio based models rely on historic data and involve the estimation of the systematic loan loss risk of a particular borrower relative to the loan loss risk of an FI's total loan portfolio. 
D) Loan loss ratio based models rely on actual data and involve the estimation of the systematic loan loss risk of a particular borrower relative to the loan loss risk of an FI's total loan portfolio. 
A) Loan loss ratio based models rely on actual data and involve the estimation of the systematic loan loss risk of a particular industry relative to the loan loss risk of an FI's total loan portfolio. 
B) Loan loss ratio based models rely on historic data and involve the estimation of the systematic loan loss risk of a particular industry relative to the loan loss risk of an FI's total loan portfolio. 
C) Loan loss ratio based models rely on historic data and involve the estimation of the systematic loan loss risk of a particular borrower relative to the loan loss risk of an FI's total loan portfolio. 
D) Loan loss ratio based models rely on actual data and involve the estimation of the systematic loan loss risk of a particular borrower relative to the loan loss risk of an FI's total loan portfolio.

Question 8

Using the KMV Portfolio Manager Model, the return on a loan can be calculated as the annual all-in-spread minus the loss in the event of default.

Accepted Answer

A) True 
 B)False

Question 9

Using the KMV Portfolio Manager Model, the risk on a loan can be calculated as the volatility of the loan's default rate times the loss in the event of default.

Accepted Answer

A) True 
 B)False

Question 10

The most important swap contract in terms of quantity is the credit swap.

Accepted Answer

A) True 
 B)False

Question 11

A transition matrix can be used to establish the probabilities that a currently rated borrower will be upgraded, downgraded or will default over time.

Accepted Answer

A) True 
 B)False

Question 12

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?

Accepted Answer

A) Loan sales and securitisation allow FIs to better manage their customer relationships. 
B) Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance sheet activities of FIs. 
C) Loan sales and securitisation reduce FIs industry and/or geographical concentration risk. 
D) Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself. 
A) Loan sales and securitisation allow FIs to better manage their customer relationships. 
B) Loan sales and securitisation create moral hazard issues and reduce scrutiny of off-balance sheet activities of FIs. 
C) Loan sales and securitisation reduce FIs industry and/or geographical concentration risk. 
D) Loan sales and securitisation allow FIs to separate their credit risk exposure from the lending process itself.

Question 13

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector.The FI's concentration limit on this sector 35 per cent.What is the sector's loss rate (round to two decimals)?

Accepted Answer

A) 4.20 per cent 
B) 23.00 per cent 
C) 34.29 per cent 
D) 2.92 per cent. 
A) 4.20 per cent 
B) 23.00 per cent 
C) 34.29 per cent 
D) 2.92 per cent.

Question 14

Which of the following statements is true?

Accepted Answer

A) As with loans, swap participants deal with the credit risk of counterparties by setting bilateral limits on the notional amount of swaps entered into. 
B) As with loans, swap participants deal with the credit risk of counterparties by adjusting the fixed and/or floating rates by including credit risk premiums. 
C) As with loans, swap participants deal with the credit risk of counterparties by using Monte Carlo simulations to model potential default risk. 
D) As with loans, swap participants deal with the credit risk of counterparties by setting bilateral limits on the notional amount of swaps entered into and as with loans, swap participants deal with the credit risk of counterparties by adjusting the fixed and/or floating rates by including credit risk premiums. 
A) As with loans, swap participants deal with the credit risk of counterparties by setting bilateral limits on the notional amount of swaps entered into. 
B) As with loans, swap participants deal with the credit risk of counterparties by adjusting the fixed and/or floating rates by including credit risk premiums. 
C) As with loans, swap participants deal with the credit risk of counterparties by using Monte Carlo simulations to model potential default risk. 
D) As with loans, swap participants deal with the credit risk of counterparties by setting bilateral limits on the notional amount of swaps entered into and as with loans, swap participants deal with the credit risk of counterparties by adjusting the fixed and/or floating rates by including credit risk premiums.

Question 15

Financial institutions do not use options to hedge credit risk exposures as credit risk is a natural risk that comes with the core activities of the bank, namely lending.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is true?

Accepted Answer

A) One advantage of using MPT for loans is that the returns on individual loans are normally distributed, meaning that the upside returns are equal to the downside risks. 
B) One objection to using MPT for loans is that the returns on individual loans are not normally distributed, meaning that most loans have unlimited upside returns and long-tail downside risks. 
C) One advantage of using MPT for loans is that the returns on individual loans are normally distributed, meaning that most loans have unlimited upside returns and unlimited downside risks. 
D) One objection to using MPT for loans is that the returns on individual loans are not normally distributed, meaning that most loans have limited upside returns and long-tail downside risks. 
A) One advantage of using MPT for loans is that the returns on individual loans are normally distributed, meaning that the upside returns are equal to the downside risks. 
B) One objection to using MPT for loans is that the returns on individual loans are not normally distributed, meaning that most loans have unlimited upside returns and long-tail downside risks. 
C) One advantage of using MPT for loans is that the returns on individual loans are normally distributed, meaning that most loans have unlimited upside returns and unlimited downside risks. 
D) One objection to using MPT for loans is that the returns on individual loans are not normally distributed, meaning that most loans have limited upside returns and long-tail downside risks.

Question 17

Consider the following table with information on the weightings and expected returns of two assets held by an FI.   What is the expected return on the portfolio (round to two decimals)?

Accepted Answer

A) (0.35 + 12.35) - (0.65 + 10.25) = 1.80% 
B) (0.35 + 0.65) * (12.35 + 10.25) = 22.60% 
C) (12.35 + 10.25) / 2 = 11.30% 
D) 0.35 * 12.35 + 0.65 * 10.25 = 10.99% 
A) (0.35 + 12.35) - (0.65 + 10.25) = 1.80% 
B) (0.35 + 0.65) * (12.35 + 10.25) = 22.60% 
C) (12.35 + 10.25) / 2 = 11.30% 
D) 0.35 * 12.35 + 0.65 * 10.25 = 10.99%

Question 18

Which of the following statements is true?

Accepted Answer

A) The objective of risk-indifferent FI managers is to minimise portfolio risk regardless of the portfolio's return. 
B) The objective of risk-indifferent FI managers is to minimise portfolio risk in turn for higher returns on the portfolio. 
C) The objective of risk-averse FI managers is to minimise portfolio risk in turn for higher returns on the portfolio. 
D) The objective of risk-averse FI managers is to minimise portfolio risk regardless of the portfolio's return. 
A) The objective of risk-indifferent FI managers is to minimise portfolio risk regardless of the portfolio's return. 
B) The objective of risk-indifferent FI managers is to minimise portfolio risk in turn for higher returns on the portfolio. 
C) The objective of risk-averse FI managers is to minimise portfolio risk in turn for higher returns on the portfolio. 
D) The objective of risk-averse FI managers is to minimise portfolio risk regardless of the portfolio's return.

Question 19

Which of the following statements is true?

Accepted Answer

A) The risk of a loan reflects the volatility of the loan's default rate around its expected value times the amount lost given default. 
B) The product of the volatility of the default rate and the loss give default (LG
D)  is called the 'unexpected loss'. 
C) The product of the volatility of the default rate and the loss give default (LG
D)  is a measure of the loan's risk. 
D) All of the listed options are correct. 
A) The risk of a loan reflects the volatility of the loan's default rate around its expected value times the amount lost given default. 
B) The product of the volatility of the default rate and the loss give default (LG
D)  is called the 'unexpected loss'. 
C) The product of the volatility of the default rate and the loss give default (LG
D)  is a measure of the loan's risk. 
D) All of the listed options are correct.

Question 20

Consider the following portfolio of assets:   What is the standard deviation of the portfolio (round to two decimals)?
A)(0.3)($ \surd$82.00) + (0.7)($ \surd$76.00) = 8.82%
B)($ \surd$82.00) + ($ \surd$76.00) = 17.77%
C)$ \surd$15.75 = 3.97%
D)$ \surd$48.93 = 6.99%

Accepted Answer

The answer of Consider the following portfolio of assets: ...

Which of the following statements is true?

Consider the following table with information on the weightings and expected returns of three assets held by an FI. What is the expected return on the portfolio (round to two decimals)?

The concentration limit for a loan portfolio is calculated as the expected default frequency of the borrower multiplied by (one divided by the loss rate).

Consider the following portfolio of assets: What is the variance of the portfolio (round to two decimals)?

Assume that an FI's concentration limit on a particular sector is 15 per cent and that the sector's loss rate is 25 per cent.What is the maximum loss as a percentage of the FI's capital (round to two decimals)?

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Which of the following statements is true?

Using the KMV Portfolio Manager Model, the return on a loan can be calculated as the annual all-in-spread minus the loss in the event of default.

Using the KMV Portfolio Manager Model, the risk on a loan can be calculated as the volatility of the loan's default rate times the loss in the event of default.

The most important swap contract in terms of quantity is the credit swap.

A transition matrix can be used to establish the probabilities that a currently rated borrower will be upgraded, downgraded or will default over time.

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector.The FI's concentration limit on this sector 35 per cent.What is the sector's loss rate (round to two decimals)?

Which of the following statements is true?

Financial institutions do not use options to hedge credit risk exposures as credit risk is a natural risk that comes with the core activities of the bank, namely lending.

Which of the following statements is true?

Consider the following table with information on the weightings and expected returns of two assets held by an FI. What is the expected return on the portfolio (round to two decimals)?

Which of the following statements is true?

Which of the following statements is true?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: The Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 11: Credit Risk II: Loan Portfolio and Concentration Risk

Which of the following statements is true?

Consider the following table with information on the weightings and expected returns of three assets held by an FI. What is the expected return on the portfolio (round to two decimals)?

The concentration limit for a loan portfolio is calculated as the expected default frequency of the borrower multiplied by (one divided by the loss rate).

Consider the following portfolio of assets: What is the variance of the portfolio (round to two decimals)?

Assume that an FI's concentration limit on a particular sector is 15 per cent and that the sector's loss rate is 25 per cent.What is the maximum loss as a percentage of the FI's capital (round to two decimals)?

Loan loss ratio based models estimate systematic loan losses by running a time-series regression of quarterly losses of the ith sector's loss rate on the quarterly loss rate of an FI's total loans.

Which of the following statements is true?

Using the KMV Portfolio Manager Model, the return on a loan can be calculated as the annual all-in-spread minus the loss in the event of default.

Using the KMV Portfolio Manager Model, the risk on a loan can be calculated as the volatility of the loan's default rate times the loss in the event of default.

The most important swap contract in terms of quantity is the credit swap.

A transition matrix can be used to establish the probabilities that a currently rated borrower will be upgraded, downgraded or will default over time.

Loan sales and securitisation are increasingly seen as valuable tools in the management of credit risk.Which of the following are not advantageous to FIs?

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector.The FI's concentration limit on this sector 35 per cent.What is the sector's loss rate (round to two decimals)?

Which of the following statements is true?

Financial institutions do not use options to hedge credit risk exposures as credit risk is a natural risk that comes with the core activities of the bank, namely lending.

Which of the following statements is true?

Consider the following table with information on the weightings and expected returns of two assets held by an FI. What is the expected return on the portfolio (round to two decimals)?

Which of the following statements is true?

Which of the following statements is true?

Consider the following portfolio of assets: What is the standard deviation of the portfolio (round to two decimals)? A)(0.3)( √ \surd√ 82.00) + (0.7)( √ \surd√ 76.00) = 8.82% B)( √ \surd√ 82.00) + ( √ \surd√ 76.00) = 17.77% C) √ \surd√ 15.75 = 3.97% D) √ \surd√ 48.93 = 6.99%

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: The Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters