Question 1

Concentration limits are external limits set on the maximum loan size that can be made to an individual borrower.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is true?

Accepted Answer

A) Total return swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap and alternative arrangements do not exist. 
B) Total return swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap, but alternative arrangements exist. 
C) Pure credit swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap and alternative arrangements do not exist. 
D) Pure credit swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap, but alternative arrangements exist. 
A) Total return swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap and alternative arrangements do not exist. 
B) Total return swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap, but alternative arrangements exist. 
C) Pure credit swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap and alternative arrangements do not exist. 
D) Pure credit swaps are typically structured in a way that any capital gains or losses are paid at the end of the swap, but alternative arrangements exist.

Question 3

Pure credit swaps are swaps by which an FI receives the:

Accepted Answer

A) par value of the loan on default in return for paying a periodic swap fee. 
B) current value of the loan on default in return for paying a periodic swap fee. 
C) residual value of the loan on default in return for paying a periodic swap fee. 
D) outstanding interest payments on the loan on default in return for paying a periodic swap fee. 
A) par value of the loan on default in return for paying a periodic swap fee. 
B) current value of the loan on default in return for paying a periodic swap fee. 
C) residual value of the loan on default in return for paying a periodic swap fee. 
D) outstanding interest payments on the loan on default in return for paying a periodic swap fee.

Question 4

An FI that invests 40 per cent of funds in a loan with an expected return of 10 per cent and 60 per cent of funds in a loan with an expected return of 12 per cent can expect to earn 11 per cent on its portfolio.

Accepted Answer

A) True 
 B)False

Question 5

KMV Portfolio Manager is a model that:

Accepted Answer

A) was developed by the KMV Corporation and purchased by Moody's in 2002. 
B) measures the expected return on a loan to a borrower, the risk of a loan to a borrower and the correlation of default risks between loans made to a borrower and other borrowers. 
C) seeks to estimate an efficient frontier for loans. 
D) All of the listed options are correct. 
A) was developed by the KMV Corporation and purchased by Moody's in 2002. 
B) measures the expected return on a loan to a borrower, the risk of a loan to a borrower and the correlation of default risks between loans made to a borrower and other borrowers. 
C) seeks to estimate an efficient frontier for loans. 
D) All of the listed options are correct.

Question 6

Which of the following statements is true?

Accepted Answer

A) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one divided by the loss rate). 
B) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one multiplied by the loss rate). 
C) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one divided by the loss rate). 
D) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one multiplied by the loss rate). 
A) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one divided by the loss rate). 
B) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one multiplied by the loss rate). 
C) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one divided by the loss rate). 
D) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one multiplied by the loss rate).

Question 7

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

Accepted Answer

A) maximum damage limits. 
B) concentration limits. 
C) syndication limits. 
D) minimisation limits. 
A) maximum damage limits. 
B) concentration limits. 
C) syndication limits. 
D) minimisation limits.

Question 8

The return (Ri) on a loan can be measured as follows:

Accepted Answer

A) AISi - E(Li), whereby E(Li) = (EDFi * LGDi) 
B) AISi - E(Li), whereby E(Li) = (EDFi / LGDi) 
C) AISi + E(Li), whereby E(Li) = (EDFi * LGDi) 
D) AISi + E(Li), whereby E(Li) = (EDFi / LGDi) 
A) AISi - E(Li), whereby E(Li) = (EDFi * LGDi) 
B) AISi - E(Li), whereby E(Li) = (EDFi / LGDi) 
C) AISi + E(Li), whereby E(Li) = (EDFi * LGDi) 
D) AISi + E(Li), whereby E(Li) = (EDFi / LGDi)

Question 9

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

Accepted Answer

A) 4.90 per cent 
B) 3.41 per cent 
C) 4.16 per cent 
D) 6.10 per cent 
A) 4.90 per cent 
B) 3.41 per cent 
C) 4.16 per cent 
D) 6.10 per cent

Question 10

Which of the following statements is true?

Accepted Answer

A) Systematic loan loss risk is a measure of the sensitivity of loan losses in personal loans relative to the losses in commercial loans. 
B) Systematic loan loss risk is a measure of the sensitivity of loan losses of a particular borrower relative to the losses in an FI's loan portfolio. 
C) Systematic loan loss risk is a measure of the sensitivity of loan losses in commercial loans relative to the losses in personal loans. 
D) Systematic loan loss risk is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio. 
A) Systematic loan loss risk is a measure of the sensitivity of loan losses in personal loans relative to the losses in commercial loans. 
B) Systematic loan loss risk is a measure of the sensitivity of loan losses of a particular borrower relative to the losses in an FI's loan portfolio. 
C) Systematic loan loss risk is a measure of the sensitivity of loan losses in commercial loans relative to the losses in personal loans. 
D) Systematic loan loss risk is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio.

Question 11

Which of the following statements is true?

Accepted Answer

A) According to KMV, default correlations tend to be low and lie between 0.002 and 0.15. 
B) According to KMV, default correlations tend to be high and lie between 0.42 and 0.65. 
C) According to KMV, default correlations vary and thus no particular range can be stated. 
D) None of the listed options are correct. 
A) According to KMV, default correlations tend to be low and lie between 0.002 and 0.15. 
B) According to KMV, default correlations tend to be high and lie between 0.42 and 0.65. 
C) According to KMV, default correlations vary and thus no particular range can be stated. 
D) None of the listed options are correct.

Question 12

Which of the following statements is true?

Accepted Answer

A) FIs typically increase their concentration limits to increase exposures to others. 
B) FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) FIs typically set concentration limits to reduce their exposure to individual borrowers. 
D) FIs typically decrease their concentration limits to decrease exposures to others. 
A) FIs typically increase their concentration limits to increase exposures to others. 
B) FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others. 
C) FIs typically set concentration limits to reduce their exposure to individual borrowers. 
D) FIs typically decrease their concentration limits to decrease exposures to others.

Question 13

Which of the following statements is true?

Accepted Answer

A) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI less the annual spread between the loan rate paid by the borrower and the FI's cost of funds. 
B) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI plus the annual spread between the loan rate paid by the borrower and the FI's cost of funds. 
C) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI plus the loan rate paid by the borrowers. 
D) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI less the FI's cost of funds. 
A) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI less the annual spread between the loan rate paid by the borrower and the FI's cost of funds. 
B) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI plus the annual spread between the loan rate paid by the borrower and the FI's cost of funds. 
C) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI plus the loan rate paid by the borrowers. 
D) The annual all-in-spread (AIS) measures annual fees earned on the loan by the FI less the FI's cost of funds.

Question 14

The relationship limit on diversification has also been called the 'paradox of credit'.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is true?

Accepted Answer

A) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 $\le$ r $\le$ + 1, where r is the correlation coefficient. 
B) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values 0 $\le$ r $\le$ + 1, where r is the correlation coefficient. 
C) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values +1 v r $\le$ + 2, where r is the correlation coefficient. 
D) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 $\le$ r $\le$ 0, where r is the correlation coefficient. 
A) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 $\le$ r $\le$ + 1, where r is the correlation coefficient. 
B) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values 0 $\le$ r $\le$ + 1, where r is the correlation coefficient. 
C) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values +1 v r $\le$ + 2, where r is the correlation coefficient. 
D) The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 $\le$ r $\le$ 0, where r is the correlation coefficient.

Question 16

Minimum risk portfolios generally generate the highest returns.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is true?

Accepted Answer

A) The fundamental lesson of modern portfolio theory (MPT ) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated. 
B) The fundamental lesson of modern portfolio theory (MP T) is that by taking advantage of its size, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated 
C) The fundamental lesson of modern portfolio theory (MPT ) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are perfectly correlated. 
D) The fundamental lesson of modern portfolio theory (MPT ) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated 
A) The fundamental lesson of modern portfolio theory (MPT ) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated. 
B) The fundamental lesson of modern portfolio theory (MP T) is that by taking advantage of its size, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated 
C) The fundamental lesson of modern portfolio theory (MPT ) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are perfectly correlated. 
D) The fundamental lesson of modern portfolio theory (MPT ) is that by taking advantage of its profitability, an FI can diversify considerable amounts of credit risk as long as the returns on different assets are imperfectly correlated

Question 18

Which of the following statements is true?

Accepted Answer

A) If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently exactly estimates the risk of the whole portfolio. 
B) If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently underestimates the risk of the whole portfolio. 
C) If many loans have positive correlations of returns the sum of the individual credit risks of loans viewed independently overestimates the risk of the whole portfolio. 
D) If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently overestimates the risk of the whole portfolio. 
A) If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently exactly estimates the risk of the whole portfolio. 
B) If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently underestimates the risk of the whole portfolio. 
C) If many loans have positive correlations of returns the sum of the individual credit risks of loans viewed independently overestimates the risk of the whole portfolio. 
D) If many loans have negative correlations of returns the sum of the individual credit risks of loans viewed independently overestimates the risk of the whole portfolio.

Question 19

Consider the following portfolio of assets:   What is the standard deviation of the portfolio (round to two decimals)?
A)(0.45)($ \surd$36.60) + (0.55)($ \surd$76.56) = 7.51%
B)($ \surd$36.60) + ($ \surd$76.56) = 14.80%
C)$ \surd$57.28 = 7.57%
D)$ \surd$25.33 = 5.03%

Accepted Answer

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

Question 20

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

Accepted Answer

A) 0.3(13%) + 0.7(11%) = 11.60% 
B) (13% + 11%) / 2 = 12.00% 
C) (0.3)2(13%) + (0.7)2(11%) = 6.56% 
D) [(0.3)2(13%) + (0.7)2(11%)] * 2 = 13.12% 
A) 0.3(13%) + 0.7(11%) = 11.60% 
B) (13% + 11%) / 2 = 12.00% 
C) (0.3)2(13%) + (0.7)2(11%) = 6.56% 
D) [(0.3)2(13%) + (0.7)2(11%)] * 2 = 13.12%

Concentration limits are external limits set on the maximum loan size that can be made to an individual borrower.

Which of the following statements is true?

Pure credit swaps are swaps by which an FI receives the:

An FI that invests 40 per cent of funds in a loan with an expected return of 10 per cent and 60 per cent of funds in a loan with an expected return of 12 per cent can expect to earn 11 per cent on its portfolio.

KMV Portfolio Manager is a model that:

Which of the following statements is true?

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

The return (R_i) on a loan can be measured as follows:

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

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

The relationship limit on diversification has also been called the 'paradox of credit'.

Which of the following statements is true?

Minimum risk portfolios generally generate the highest returns.

Which of the following statements is true?

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)?

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

Concentration limits are external limits set on the maximum loan size that can be made to an individual borrower.

Which of the following statements is true?

Pure credit swaps are swaps by which an FI receives the:

An FI that invests 40 per cent of funds in a loan with an expected return of 10 per cent and 60 per cent of funds in a loan with an expected return of 12 per cent can expect to earn 11 per cent on its portfolio.

KMV Portfolio Manager is a model that:

Which of the following statements is true?

Limits set on the maximum loan size that can be made to an individual borrower are referred to as:

The return (Ri) on a loan can be measured as follows:

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

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

The relationship limit on diversification has also been called the 'paradox of credit'.

Which of the following statements is true?

Minimum risk portfolios generally generate the highest returns.

Which of the following statements is true?

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)?

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

The return (R_i) on a loan can be measured as follows: