Question 1

A forward contract:

Accepted Answer

A) has more credit risk than a futures contract. 
B) is more standardised than a futures contract. 
C) is marked to market more frequently than a futures contract. 
D) has a shorter time to delivery than a futures contract. 
A) has more credit risk than a futures contract. 
B) is more standardised than a futures contract. 
C) is marked to market more frequently than a futures contract. 
D) has a shorter time to delivery than a futures contract.

Question 2

Which of the following is a major difference between forwards and futures?

Accepted Answer

A) Forwards are marked-to-market, while futures are not. 
B) Futures are tailor made, while forwards are standardised. 
C) The default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards. 
D) Forwards are marked-to-market, while futures are not, futures are tailor made, while forwards are standardised and the default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards. 
A) Forwards are marked-to-market, while futures are not. 
B) Futures are tailor made, while forwards are standardised. 
C) The default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards. 
D) Forwards are marked-to-market, while futures are not, futures are tailor made, while forwards are standardised and the default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards.

Question 3

Which of the following is incorrect in relation to debt recovery rates?

Accepted Answer

A) Macro-economic factors are found to be significant in explaining recovery rates on defaulted bonds. 
B) Macro-economic factors are found to be insignificant in explaining recovery rates on defaulted bonds. 
C) Senior securities tend to have higher recovery rates than subordinated securities. 
D) Industrial revenue bonds tend to have higher recovery rates than subordinated securities. 
A) Macro-economic factors are found to be significant in explaining recovery rates on defaulted bonds. 
B) Macro-economic factors are found to be insignificant in explaining recovery rates on defaulted bonds. 
C) Senior securities tend to have higher recovery rates than subordinated securities. 
D) Industrial revenue bonds tend to have higher recovery rates than subordinated securities.

Question 4

Assume that the maximum loss as a percentage of capital is 9 per cent of an FI's capital to a particular sector and that the amount recovered per dollar of defaulted loans in this sector is 70 per cent.What is the concentration limit (round to two decimals)?

Accepted Answer

A) 9% * (1/0.7) = 12.86% 
B) 9% * [1/(1-0.7)] = 30.00% 
C) 70% / (1/0.09) = 6.30% 
D) (100% - 70%) / (1/0.09) = 2.70% 
A) 9% * (1/0.7) = 12.86% 
B) 9% * [1/(1-0.7)] = 30.00% 
C) 70% / (1/0.09) = 6.30% 
D) (100% - 70%) / (1/0.09) = 2.70%

Question 5

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

Accepted Answer

A) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted by the FI to reflect its levels of portfolio concentration or diversification. 
B) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted up or down to reflect the levels of portfolio concentration or diversification. 
C) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted up to reflect the levels of portfolio diversification. 
D) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted down to reflect the levels of portfolio concentration. 
A) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted by the FI to reflect its levels of portfolio concentration or diversification. 
B) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted up or down to reflect the levels of portfolio concentration or diversification. 
C) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted up to reflect the levels of portfolio diversification. 
D) The issue of granularity means that if banks hold relatively large exposures to an individual borrower or sector to a reference portfolio they have devised, then risk weightings required in the capital to be held will be adjusted down to reflect the levels of portfolio concentration.

Question 6

A pure credit swap:

Accepted Answer

A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in the total return swap. 
D) is like buying credit insurance, is like buying a multi-period credit option and eliminates the interest rate risk contained in the total return swap. 
A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in the total return swap. 
D) is like buying credit insurance, is like buying a multi-period credit option and eliminates the interest rate risk contained in the total return swap.

Question 7

Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?

Accepted Answer

A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted across more than on contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Swap contracts often extend beyond the maturity of normal loan contracts, swap payments can be netted across more than on contract and Interest rate swaps involve interest, but not principal. 
A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted across more than on contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Swap contracts often extend beyond the maturity of normal loan contracts, swap payments can be netted across more than on contract and Interest rate swaps involve interest, but not principal.

Question 8

Explain the basic concept of loan loss ratio based models.

Accepted Answer

WHERE @#LAT-DLM& MEASURES THE LOAN LOSS RATE FOR A

Question 9

Which of the following statements is true?

Accepted Answer

A) The minimum risk portfolio generates the highest returns and is thus likely to be chosen by risk-seeking FI managers. 
B) The minimum risk portfolio does not generate the highest returns and is thus likely to be chosen by risk-averse FI managers. 
C) The minimum risk portfolio does not generate the highest returns and is thus likely to be chosen by risk-seeking FI managers. 
D) The minimum risk portfolio does not generate the highest returns and is thus likely to be chosen by risk-indifferent FI managers. 
A) The minimum risk portfolio generates the highest returns and is thus likely to be chosen by risk-seeking FI managers. 
B) The minimum risk portfolio does not generate the highest returns and is thus likely to be chosen by risk-averse FI managers. 
C) The minimum risk portfolio does not generate the highest returns and is thus likely to be chosen by risk-seeking FI managers. 
D) The minimum risk portfolio does not generate the highest returns and is thus likely to be chosen by risk-indifferent FI managers.

Question 10

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

Accepted Answer

A) (0.3)2(82.0%) + (0.7)2(76.0%) + (0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 30.19 
B) (0.3)2(82.0%) + (0.7)2(76.0%) + [(0.3)(0.7)]2 * (-0.87) * (9.06%)(8.72%) = 41.59 
C) (0.3)2(82.0%) + (0.7)2(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 15.75 
D) (0.3)(82.0%) + (0.7)(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 48.93 
A) (0.3)2(82.0%) + (0.7)2(76.0%) + (0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 30.19 
B) (0.3)2(82.0%) + (0.7)2(76.0%) + [(0.3)(0.7)]2 * (-0.87) * (9.06%)(8.72%) = 41.59 
C) (0.3)2(82.0%) + (0.7)2(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 15.75 
D) (0.3)(82.0%) + (0.7)(76.0%) + 2(0.3)(0.7)(-0.87) * (9.06%)(8.72%) = 48.93

Question 11

Which of the following statements is true?

Accepted Answer

A) FIs can reduce profitability by taking advantage of the law of small numbers in their investment decisions. 
B) FIs can reduce profitability by taking advantage of the law of large numbers in their investment decisions. 
C) FIs can reduce risk by taking advantage of the law of small numbers in their investment decisions. 
D) FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions. 
A) FIs can reduce profitability by taking advantage of the law of small numbers in their investment decisions. 
B) FIs can reduce profitability by taking advantage of the law of large numbers in their investment decisions. 
C) FIs can reduce risk by taking advantage of the law of small numbers in their investment decisions. 
D) FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Question 12

Migration analysis is a method to:

Accepted Answer

A) manage loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines. 
B) measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines. 
C) measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for normal declines. 
D) manage loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for normal declines. 
A) manage loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines. 
B) measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines. 
C) measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for normal declines. 
D) manage loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for normal declines.

Question 13

Which of the following statements is true?

Accepted Answer

A) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are negatively correlated. 
B) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are highly correlated. 
C) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are not correlated. 
D) FIs may set an aggregate limit of more than the sum of two individual industry limits if two industry groups' performance are negatively correlated. 
A) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are negatively correlated. 
B) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are highly correlated. 
C) FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups' performance are not correlated. 
D) FIs may set an aggregate limit of more than the sum of two individual industry limits if two industry groups' performance are negatively correlated.

Question 14

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

Accepted Answer

A) (15% + 13%) / 2 = 14.00% 
B) (0.45)2(15%) + (0.7)2(13%) = 9.41% 
C) [(0.45)2(15%) + (0.7)2(13%)] * 2 = 18.82% 
D) 0.45(15%) + 0.7(13%) = 15.85% 
A) (15% + 13%) / 2 = 14.00% 
B) (0.45)2(15%) + (0.7)2(13%) = 9.41% 
C) [(0.45)2(15%) + (0.7)2(13%)] * 2 = 18.82% 
D) 0.45(15%) + 0.7(13%) = 15.85%

Question 15

Consider the following hypothetical transition matrix: Risk grade at end of year
  Which of the following statements is true?

Accepted Answer

A) A borrower with a risk grade of 2 at the beginning of the year has a 3 per cent probability of being downgraded to a risk grade of 3. 
B) A borrower with a risk grade of 3 at the beginning of the year has a 0.04 per cent probability of being upgraded to a risk grade of 1. 
C) A borrower with a risk grade of 2 at the beginning of the year has a 12 per cent probability of being downgraded to a risk grade of 1. 
D) A borrower with a risk grade of 2 at the beginning of the year has an 85 per cent probability of being upgraded to a risk grade of 1. 
A) A borrower with a risk grade of 2 at the beginning of the year has a 3 per cent probability of being downgraded to a risk grade of 3. 
B) A borrower with a risk grade of 3 at the beginning of the year has a 0.04 per cent probability of being upgraded to a risk grade of 1. 
C) A borrower with a risk grade of 2 at the beginning of the year has a 12 per cent probability of being downgraded to a risk grade of 1. 
D) A borrower with a risk grade of 2 at the beginning of the year has an 85 per cent probability of being upgraded to a risk grade of 1.

Question 16

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

Accepted Answer

A) True 
 B)False

Question 17

The term 'transition matrix' refers to a matrix that provides a measurement of the probability of a loan:

Accepted Answer

A) being upgraded over some period. 
B) being downgraded over some period. 
C) defaulting over some period. 
D) All of the listed options are correct. 
A) being upgraded over some period. 
B) being downgraded over some period. 
C) defaulting over some period. 
D) All of the listed options are correct.

Question 18

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent.What is the concentration limit (round to two decimals)?

Accepted Answer

A) 12% * (1/0.35) = 34.29% 
B) 35% * (1/0.12) = 4.2% 
C) 12% / (1 + 0.35) = 8.89% 
D) 35% / (1 + 0.12) = 31.25% 
A) 12% * (1/0.35) = 34.29% 
B) 35% * (1/0.12) = 4.2% 
C) 12% / (1 + 0.35) = 8.89% 
D) 35% / (1 + 0.12) = 31.25%

Question 19

Consider an FI that holds two loans with the following characteristics:   What is the return on the loan portfolio (round to two decimals)?

Accepted Answer

A) 6.50 per cent 
B) 6.90 per cent 
C) 13.40 per cent 
D) 6.78 per cent 
A) 6.50 per cent 
B) 6.90 per cent 
C) 13.40 per cent 
D) 6.78 per cent

Question 20

Which of the following is a major difference between a pure credit swap and a default option?

Accepted Answer

A) In a pure credit swap the premium payment on the swap is paid up front, while the fees of a default option are paid over the life of the default option. 
B) In a pure credit swap the premium payments on the swap are paid over the life of the swap, while the fee of a default option is paid up front. 
C) In a pure credit swap the premium payment on the swap is paid at maturity, while the fees of a default option are paid over the life of the default option. 
D) In a pure credit swap the premium payments on the swap are paid over the life of the swap, while the fee of a default option is paid at maturity. 
A) In a pure credit swap the premium payment on the swap is paid up front, while the fees of a default option are paid over the life of the default option. 
B) In a pure credit swap the premium payments on the swap are paid over the life of the swap, while the fee of a default option is paid up front. 
C) In a pure credit swap the premium payment on the swap is paid at maturity, while the fees of a default option are paid over the life of the default option. 
D) In a pure credit swap the premium payments on the swap are paid over the life of the swap, while the fee of a default option is paid at maturity.

A forward contract:

Which of the following is a major difference between forwards and futures?

Which of the following is incorrect in relation to debt recovery rates?

Assume that the maximum loss as a percentage of capital is 9 per cent of an FI's capital to a particular sector and that the amount recovered per dollar of defaulted loans in this sector is 70 per cent.What is the concentration limit (round to two decimals)?

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

A pure credit swap:

Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?

Explain the basic concept of loan loss ratio based models.

Which of the following statements is true?

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

Which of the following statements is true?

Migration analysis is a method to:

Which of the following statements is true?

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

Consider the following hypothetical transition matrix: Risk grade at end of year Which of the following statements is true?

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

The term 'transition matrix' refers to a matrix that provides a measurement of the probability of a loan:

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent.What is the concentration limit (round to two decimals)?

Consider an FI that holds two loans with the following characteristics: What is the return on the loan portfolio (round to two decimals)?

Which of the following is a major difference between a pure credit swap and a default option?

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

A forward contract:

Which of the following is a major difference between forwards and futures?

Which of the following is incorrect in relation to debt recovery rates?

Assume that the maximum loss as a percentage of capital is 9 per cent of an FI's capital to a particular sector and that the amount recovered per dollar of defaulted loans in this sector is 70 per cent.What is the concentration limit (round to two decimals)?

The Basel Committee on Banking Supervision considers regulatory loan concentration limits to individual borrowers as an issue of granularity.Which of the following statements is true in this context?

A pure credit swap:

Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?

Explain the basic concept of loan loss ratio based models.

Which of the following statements is true?

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

Which of the following statements is true?

Migration analysis is a method to:

Which of the following statements is true?

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

Consider the following hypothetical transition matrix: Risk grade at end of year Which of the following statements is true?

FIs can reduce risk by taking advantage of the law of large numbers in their investment decisions.

The term 'transition matrix' refers to a matrix that provides a measurement of the probability of a loan:

Assume that the maximum loss as a percentage of capital is 12 per cent of an FI's capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35 per cent.What is the concentration limit (round to two decimals)?

Consider an FI that holds two loans with the following characteristics: What is the return on the loan portfolio (round to two decimals)?

Which of the following is a major difference between a pure credit swap and a default option?

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