Question 1

How would you interpret a Z score of 2.25?

Accepted Answer

A) The Z score lies within the 'safe' zone and thus a loan should be granted. 
B) The Z score lies within the 'high default' zone and thus a loan should be granted. 
C) The Z score lies within the 'zone of ignorance' and thus the borrower may or may not default. 
D) The interpretation of the Z score is always dependent on an FI manager's subjective opinion. 
A) The Z score lies within the 'safe' zone and thus a loan should be granted. 
B) The Z score lies within the 'high default' zone and thus a loan should be granted. 
C) The Z score lies within the 'zone of ignorance' and thus the borrower may or may not default. 
D) The interpretation of the Z score is always dependent on an FI manager's subjective opinion. C

Question 2

Which of the following statements is true?

Accepted Answer

A) A credit scoring model is a mathematical model that considers a borrower's credit rating to make loan decisions. 
B) A credit scoring model is a model that relies on expert knowledge to make loan decisions. 
C) A credit scoring model is a mathematical model that uses observed borrower characteristics to calculate a score representing the applicant's probability of default or to sort borrowers into different default classes. 
D) A credit scoring model is a mathematical model that uses neural networks to make loan decisions. 
A) A credit scoring model is a mathematical model that considers a borrower's credit rating to make loan decisions. 
B) A credit scoring model is a model that relies on expert knowledge to make loan decisions. 
C) A credit scoring model is a mathematical model that uses observed borrower characteristics to calculate a score representing the applicant's probability of default or to sort borrowers into different default classes. 
D) A credit scoring model is a mathematical model that uses neural networks to make loan decisions. C

Question 3

Consider the following scenario: an FI charges a 0.5 per cent loan origination fee and imposes an 8 per cent compensating balance requirement to be held as non-interest bearing demand deposits.It further sets aside reserves held at the central bank.The value of these reserves is 10 per cent of deposits.The base lending rate is 9 per cent and the credit risk premium for a specific borrower is 3 per cent.What is the ROA on the loan?

Accepted Answer

A) 12.60 per cent 
B) 11.00 per cent 
C) 11.50 per cent 
D) Not enough information to solve the question. 
A) 12.60 per cent 
B) 11.00 per cent 
C) 11.50 per cent 
D) Not enough information to solve the question. A

Question 4

Which of the following statements is true?

Accepted Answer

A) A commercial paper is an unsecured long-term debt instrument issued by corporations. 
B) A commercial paper is a secured long-term debt instrument issued by corporations. 
C) A commercial paper is a secured short-term debt instrument issued by corporations. 
D) A commercial paper is an unsecured short-term debt instrument issued by corporations. 
A) A commercial paper is an unsecured long-term debt instrument issued by corporations. 
B) A commercial paper is a secured long-term debt instrument issued by corporations. 
C) A commercial paper is a secured short-term debt instrument issued by corporations. 
D) A commercial paper is an unsecured short-term debt instrument issued by corporations.

Question 5

Consider the following data of a prospective borrower.   What is this company's Z score (round to two decimals)?

Accepted Answer

A) 3.78 
B) 3.88 
C) 3.98 
D) 4.08 
A) 3.78 
B) 3.88 
C) 3.98 
D) 4.08

Question 6

Explain the major concept of Altman's linear discriminant model.What would you consider to be the major disadvantages of this model?

Accepted Answer

Discriminant models divide borrowers int

Question 7

Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10 per cent and a sudden change in the credit premium of 1 per cent is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

Accepted Answer

A) 10.00 per cent 
B) 11.00 per cent 
C) 22.00 per cent 
D) 50.00 per cent 
A) 10.00 per cent 
B) 11.00 per cent 
C) 22.00 per cent 
D) 50.00 per cent

Question 8

The term disintermediation refers to the process in which firms access:

Accepted Answer

A) money markets directly. 
B) money markets via financial intermediaries. 
C) capital markets directly. 
D) capital markets via financial intermediaries. 
A) money markets directly. 
B) money markets via financial intermediaries. 
C) capital markets directly. 
D) capital markets via financial intermediaries.

Question 9

Which of the following statements is true?

Accepted Answer

A) Marginal mortality rate is the historic default rate experience of a bond or loan. 
B) The mortality rate is the probability of a bond or loan defaulting over a specified multi-year period. 
C) Marginal mortality rate is the probability of a bond or loan defaulting in any given year of issue. 
D) Marginal mortality rate is the probability of a bond or loan defaulting over a specified multi-year period. 
A) Marginal mortality rate is the historic default rate experience of a bond or loan. 
B) The mortality rate is the probability of a bond or loan defaulting over a specified multi-year period. 
C) Marginal mortality rate is the probability of a bond or loan defaulting in any given year of issue. 
D) Marginal mortality rate is the probability of a bond or loan defaulting over a specified multi-year period.

Question 10

Which of the following statements is false?

Accepted Answer

A) Default risk is the risk that the borrower is willing but unable to fulfil the terms promised under loan contract. 
B) Default risk is the risk that the borrower refinances the loan before maturity. 
C) Default risk is the risk that the borrower is able but unwilling to fulfil the terms promised under loan contract. 
D) Default risk is the risk that the borrower is unable and unwilling to fulfil the terms promised under loan contract. 
A) Default risk is the risk that the borrower is willing but unable to fulfil the terms promised under loan contract. 
B) Default risk is the risk that the borrower refinances the loan before maturity. 
C) Default risk is the risk that the borrower is able but unwilling to fulfil the terms promised under loan contract. 
D) Default risk is the risk that the borrower is unable and unwilling to fulfil the terms promised under loan contract.

Question 11

An unsecured loan is also referred to as:

Accepted Answer

A) non-asset backed loan. 
B) mezzanine debt. 
C) junior debt. 
D) senior debt. 
A) non-asset backed loan. 
B) mezzanine debt. 
C) junior debt. 
D) senior debt.

Question 12

Assume that f1 = 13.50 per cent and c1 = 17.40 per cent.Which of the following statements is true?

Accepted Answer

A) The expected default probability of repayment is 96.10 per cent. 
B) The expected probability of repayment is 3.32 per cent. 
C) The one-year rate expected on corporate securities one year into the future is 13.50 per cent. 
D) The current one-year rate on corporate securities is 17.40 per cent. 
A) The expected default probability of repayment is 96.10 per cent. 
B) The expected probability of repayment is 3.32 per cent. 
C) The one-year rate expected on corporate securities one year into the future is 13.50 per cent. 
D) The current one-year rate on corporate securities is 17.40 per cent.

Question 13

A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service its loans.

Accepted Answer

A) True 
 B)False

Question 14

Banks have been partially responsible for big corporate collapses such as Enron.

Accepted Answer

A) True 
 B)False

Question 15

A company with an Altman Z score of 3.15 should not be granted a loan due to a high default probability.

Accepted Answer

A) True 
 B)False

Question 16

What are the major ideas behind KMV's Credit Monitor Model?

Accepted Answer

The KMV model uses an option pricing mod

Question 17

By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.

Accepted Answer

A) True 
 B)False

Question 18

Non-performing loans are loans:
A)given out to corporations with low credit ratings.
B)that require re-evaluating of credit terms after every six months.
C)characterised by some type of default-from non-payment to delays in payment of interest and/or principal.
D)None of the listed options are correct.

Accepted Answer

The answer of Non-performing loans are loans:
A)given out to corporations...

Question 19

A credit line on which a borrower can both draw and repay many times over the life of the loan contract is called a:

Accepted Answer

A) reviving loan. 
B) revolving loan. 
C) refilling loan. 
D) A credit line does not exist. 
A) reviving loan. 
B) revolving loan. 
C) refilling loan. 
D) A credit line does not exist.

Question 20

Credit scoring models include:

Accepted Answer

A) linear probability models. 
B) logit models. 
C) linear discriminant analysis. 
D) All of the listed options are correct. 
A) linear probability models. 
B) logit models. 
C) linear discriminant analysis. 
D) All of the listed options are correct.

How would you interpret a Z score of 2.25?

Which of the following statements is true?

Which of the following statements is true?

Consider the following data of a prospective borrower. What is this company's Z score (round to two decimals)?

Explain the major concept of Altman's linear discriminant model.What would you consider to be the major disadvantages of this model?

Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10 per cent and a sudden change in the credit premium of 1 per cent is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

The term disintermediation refers to the process in which firms access:

Which of the following statements is true?

Which of the following statements is false?

An unsecured loan is also referred to as:

Assume that f₁ = 13.50 per cent and c₁ = 17.40 per cent.Which of the following statements is true?

A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service its loans.

Banks have been partially responsible for big corporate collapses such as Enron.

A company with an Altman Z score of 3.15 should not be granted a loan due to a high default probability.

What are the major ideas behind KMV's Credit Monitor Model?

By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.

A credit line on which a borrower can both draw and repay many times over the life of the loan contract is called a:

Credit scoring models include:

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 II: Loan Portfolio and Concentration 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 10: Credit Risk I: Individual Loan Risk

How would you interpret a Z score of 2.25?

Which of the following statements is true?

Which of the following statements is true?

Consider the following data of a prospective borrower. What is this company's Z score (round to two decimals)?

Explain the major concept of Altman's linear discriminant model.What would you consider to be the major disadvantages of this model?

Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10 per cent and a sudden change in the credit premium of 1 per cent is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

The term disintermediation refers to the process in which firms access:

Which of the following statements is true?

Which of the following statements is false?

An unsecured loan is also referred to as:

Assume that f1 = 13.50 per cent and c1 = 17.40 per cent.Which of the following statements is true?

A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service its loans.

Banks have been partially responsible for big corporate collapses such as Enron.

A company with an Altman Z score of 3.15 should not be granted a loan due to a high default probability.

What are the major ideas behind KMV's Credit Monitor Model?

By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.

A credit line on which a borrower can both draw and repay many times over the life of the loan contract is called a:

Credit scoring models include:

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 II: Loan Portfolio and Concentration 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

Assume that f₁ = 13.50 per cent and c₁ = 17.40 per cent.Which of the following statements is true?