Accounting
Anthropology
Archaeology
Art History
Banking
Biology & Life Science
Business
Business Communication
Business Development
Business Ethics
Business Law
Chemistry
Communication
Computer Science
Counseling
Criminal Law
Curriculum & Instruction
Design
Earth Science
Economic
Education
Engineering
Finance
History & Theory
Humanities
Human Resource
International Business
Investments & Securities
Journalism
Law
Management
Marketing
Medicine
Medicine & Health Science
Nursing
Philosophy
Physic
Psychology
Real Estate
Science
Social Science
Sociology
Special Education
Speech
Visual Arts
Banking
Q:
Under which model does an FI compare its own allocation of loans in any specific area with the national allocations across borrowers to measure the extent to which its loan portfolio deviates from the market portfolio benchmark?
A. CreditMetrics.
B. Credit Risk +.
C. Loan loss ratio-based model.
D. Moody's Analytics portfolio manager model.
E. Loan volume-based model.
Q:
In applying the loan loss ratio models, the loss rate "β" for the whole loan portfolio is
A. 0.
B. 0.5.
C. 1.
D. 2.
E. negative.
Q:
Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?
A. CreditMetrics.
B. Credit Risk +.
C. Loan loss ratio-based model.
D. KMV portfolio manager model.
E. Loan volume-based model.
Q:
Which of the following 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. Loss rate.
B. Systematic loan loss risk.
C. Concentration limit.
D. Loss given default.
E. Expected default frequency.
Q:
Which of the following is a source of loan volume data?
A. Commercial bank call reports.
B. Data on shared national credits.
C. Commercial databases.
D. All of the above.
E. Only the Federal Reserve has this data.
Q:
Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk.
A. The Bank Holding Company Act (1956).
B. FDIC Improvement Act (1991).
C. Depository Institutions Deregulation and Monetary Control Act (1980).
D. Garn-St. Germain Depository Institutions Act (1982).
E. Financial Institutions Reform Recovery and Enforcement Act (1989).
Q:
In the Moody's Analytics model, which of the following is a function of the historical returns of the individual assets.
A. The risk of a loan.
B. The expected default frequency.
C. The loss given default.
D. The correlation of default risk.
E. The volatility of the loan's default rate.
Q:
In the Moody's Analytics portfolio model, the risk of a loan measures
A. the product of the estimated loss given default and risk-free rate on a security of equivalent maturity.
B. annual all-in-spread minus the loss given default.
C. annual all-in-spread minus the expected default frequency.
D. the product of the expected default frequency and the estimated loss given default.
E. the volatility of the loan's default rate around its expected value times the amount lost given default.
Q:
In the Moody's Analytics portfolio model, the expected loss on a loan is
A. the product of the estimated loss given default and risk-free rate on a security of equivalent maturity.
B. annual all-in-spread minus the loss given default.
C. annual all-in-spread minus the expected default frequency.
D. the product of the expected default frequency and the estimated loss given default.
E. the volatility of the loan's default rate around its expected value.
Q:
In the Moody's Analytics portfolio model, the expected return on a loan is the
A. annual all-in-spread minus the expected loss on the loan.
B. annual all-in-spread minus expected probability of the borrower defaulting over the next year.
C. annual all-in-spread minus the loss given default.
D. the interest and fees paid by the borrower minus the interest paid by the FI to fund the loan.
E. the interest and fees paid by the borrower minus the expected loss on the loan.
Q:
Matrix Bank has compiled the following migration matrix on consumer loans. Which of the following statements accurately summarizes this data?A. Ten percent of grade two loans were upgraded during the year.B. Grade one loans have a higher probability of downgrade than grades two or three.C. Grade three loans have a higher probability of upgrade than grade two loans.D. Grade three loans have a higher probability of downgrade than grade two loans.E. All of the above.
Q:
In 1994, The Federal Reserve Board ruled against a proposal to use quantitative models to assess credit concentration risk because
A. current methods to identify concentration risk were not sufficiently advanced.
B. there was no public data on default rates on publicly traded bonds.
C. there was sufficient information on commercial loan defaults for banks to perform in-house analysis.
D. problems related to credit concentration risk have been minimal for U.S. banks.
E. there was already a law that requires banks to set aside capital to compensate for credit concentration risk.
Q:
As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into
A. credit risk and market risk.
B. systematic risk and unsystematic risk.
C. market risk and sovereign risk.
D. regional risk and maturity risk.
E. systematic risk and default risk.
Q:
On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of
A. 15 percent
B. 25 percent
C. 40 percent
D. 45 percent
E. 60 percent
Q:
According to Moody's Analytics, default correlations tend to be _____ and lie between _______.
A. Low; 0.002 and 0.15
B. High; 1.86 and 2.99
C. Low; 0.001 and 0.002
D. High; 2.99 and 3.50
E. Low; 0 and 0.001
Q:
Any model that seeks to estimate an efficient frontier for loans, and thus the optimal proportions in which to hold loans made to different borrowers, needs to determine and measure the
A. expected return on each loan to a borrower.
B. risk of each loan made to a borrower.
C. correlation of default risks between loans made to borrowers.
D. expected return of the entire loan portfolio
E. All of the above.
Q:
What does Moody's Analytics Portfolio Manager Model use to identify the overall risk of the portfolio?
A. Maximum loss as a percent of capital.
B. Historical loan loss ratios.
C. Default probability on each loan in a portfolio.
D. Market value of an asset and the volatility of that asset's price.
E. Mean of the value of loans in a portfolio.
Q:
If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?
A. 5 percent.
B. 10 percent.
C. 15 percent.
D. 20 percent.
E. 25 percent.
Q:
If a bank's concentration limit (as a percentage of capital) is 25.0 percent, and it does not permit a loss of any loan to impact more than 10 percent of its capital, what is the expected recovery on loans that are defaulted?
A. 20 percent.
B. 30 percent.
C. 40 percent.
D. 50 percent.
E. 60 percent.
Q:
If the amount lost per dollar on a defaulted loan is 40 percent, then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to A. 5 percent.B. 15 percent.C. 25 percent.D. 30 percent.E. 50 percent.
Q:
A weakness of migration analysis to evaluate credit concentration risk is that the
A. information obtained for this analysis is usually ex-post (i.e. after the fact).
B. information obtained for this analysis is ex-ante (i.e. before the fact).
C. analysis makes use of historical data classified only by industries.
D. analysis makes use of historical data classified by individual firms.
E. migration of firms may only be temporary.
Q:
Which of the following observations concerning concentration limits is not true?
A. Limits are set by assessing the borrower's current portfolio, its operating unit's business plans, its economists' economic projections, and its strategic plans.
B. FIs set concentration limits to reduce exposures to certain industries and increase exposures to others.
C. When two industry groups' performances are highly correlated, an FI may set an aggregate limit of less than the sum of the two individual industry limits.
D. FIs may set aggregate portfolio limits or combinations of industry and geographic limits.
E. Bank regulators in recent years have limited loan concentrations to individual borrowers to a maximum of 30 percent of a bank's capital.
Q:
Migration analysis is a tool to measure credit concentration risk and refers to
A. the identification of problem loans in sectors by observing periodic migration of industries.
B. the identification of credit concentration by observing trends in market borrowing by different sectors of the industry.
C. the identification of credit concentration by observing the downgrading or upgrading of credit ratings on securities in different sectors of industry by public rating agencies.
D. the identification of borrowing patterns such as long or short term debt by different sectors of industry.
E. the identification of shifts in debt/asset ratios of firms in specific industries.
Q:
Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?
A. Migration analysis.
B. Concentration limits.
C. Loan loss ratio-based model.
D. Moody's Analytics portfolio manager model.
E. Loan volume-based model.
Q:
General diversification limits established by life and property and casualty insurance regulators are based on the concepts of modern portfolio theory.
Q:
Recent Federal Reserve policy for measuring credit concentration risk favors technical models over subjective analysis.
Q:
Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the FI's entire loan portfolio.
Q:
Included in the Moody's Analytics model are recovery rates on defaulted loans.
Q:
The all-in-spread (AIS) used in the Moody's Analytics model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.
Q:
Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.
Q:
Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.
Q:
Commercial bank call reports are provided by banks to the Federal Reserve and are useful in determining the proportion of loans in different classifications for the entire banking system.
Q:
Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.
Q:
A disadvantage to modern portfolio theory (MPT) is that small institutions generally hold significant amounts of regionally specific and illiquid loans.
Q:
One advantage of portfolio diversification methods is that they are applicable to all FIs, regardless of their size.
Q:
Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.
Q:
The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.
Q:
The expected return of a portfolio of loans is equal to the weighted average of the expected returns of the individual loans.
Q:
In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.
Q:
In the past, data availability limited the use of sophisticated portfolio models to set concentration limits.
Q:
Migration analysis is not appropriate for an FI to use in the analysis of credit risk of consumer loans and credit card portfolios.
Q:
The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.
Q:
Concentration limits are used to either reduce or increase exposure to specific industries.
Q:
The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.
Q:
Revolving loans are credit lines
A. that allow the borrower to borrow the repeat credit only after the first loan is repaid.
B. that specify a maximum size and a maximum period of time over which the borrower can withdraw funds.
C. whose interest rate adjusts with movements in an underlying market index interest rate.
D. on which a borrower can both draw and repay many times over the life of the loan contract.
E. that include new and used automobile loans, mobile home loans, and fixed-term consumer loans.
Q:
Which of the following is NOT characteristic of the consumer loans at U.S. banks?
A. Non revolving consumer loans is the largest class of loans.
B. Credit card loans often have default rates between four and eight percent.
C. Usury ceilings affect the rate structure for consumer loans.
D. Consumer loans differ widely with respect to collateral, rates, maturity, and noninterest fees.
E. Revolving consumer loans include new and used automobile loans, mobile home loans, and fixed-term consumer loans.
Q:
Which of the following is NOT characteristic of the real estate portfolio for most banks?
A. Commercial real estate mortgages have been the fastest growing component of real estate loans.
B. Adjustable rate mortgages have rates that are periodically adjusted to some index.
C. Borrowers prefer fixed-rate loans to ARMs during periods of high interest rates.
D. Residential mortgages are the largest component of the real estate loan portfolio.
E. The proportion of ARMs to fixed-rate mortgages can vary considerably over the rate cycle.
Q:
Which of the following is true of commercial paper?
A. It is a secured long-term debt instrument issued by corporations.
B. It is always issued via an underwriter.
C. It may help a corporation to raise funds often at rates below those banks charge.
D. All corporations can tap the commercial paper market.
E. Total commercial paper outstanding in the US is smaller than total C&I loans.
Q:
Which of the following observations concerning floating-rate loans is NOT true?
A. They have less credit risk than fixed-rate loans.
B. They better enable FIs to hedge the cost of rising interest rates on liabilities.
C. They pass the risk of interest rate changes onto borrowers.
D. In rising interest rate environments, borrowers may find themselves unable to pay the interest on their floating-rate loans.
E. The loan rate can be periodically adjusted according to a formula.
Q:
All other things equal, longer term loans are more likely to be
A. variable-rate loans.
B. fixed-rate loans.
C. commitment loans.
D. lowest risk category loans.
E. high interest rate loans.
Q:
From the perspective of an FI, which of the following is an advantage of a floating-rate loan?
A. Stable interest payments will be received throughout the loan period.
B. The pre-specified interest rate remains in force over the loan contract period no matter what happens to market interest rates.
C. The bank can request repayment of a loan at any time in the contract period.
D. The default risk is completely eliminated.
E. The interest rate risk is transferred to the borrower.
Q:
Which of the following observations is true of a spot loan?
A. It involves a maximum size and a maximum period of time over which the borrower can withdraw funds.
B. It involves immediate withdrawal of the entire loan amount by the borrower.
C. It is an unsecured short-term debt instrument issued by corporations.
D. It is a nonbank loan substitute.
E. It is a line of credit.
Q:
Which of the following is not a characteristic of a loan commitment?
A. The maximum amount of the loan is negotiated at the time of the loan agreement.
B. The interest rate on fixed-rate loans is determined at the time of the loan is actually taken down.
C. Floating-rate loans transfer the interest rate risk to the borrower.
D. The time period for which the loan is available is negotiated at the time of the loan agreement.
E. In a floating-rate loan the borrower pays interest rate in force when the loan is actually taken down.
Q:
The traditional duration equation can be used to measure the capital at risk on the loan.
Q:
A major problem in estimating RAROC is the measurement of loan risk.
Q:
RAROC is a measure of a firm's cost of debt.
Q:
The payoff function of a loan to a debt holder is similar to writing a call option on the value of the borrower's assets with the face value of the debt as the exercise price.
Q:
One of the problems with estimating expected default rates is that the analysis is based on historic data.
Q:
Which of the following is true of commercial paper?
A. It is a secured long-term debt instrument issued by corporations.
B. It is always issued via an underwriter.
C. It may help a corporation to raise funds often at rates below those banks charge.
D. All corporations can tap the commercial paper market.
E. Total commercial paper outstanding in the US is smaller than total C&I loans.
Q:
Which of the following observations concerning floating-rate loans is NOT true?
A. They have less credit risk than fixed-rate loans.
B. They better enable FIs to hedge the cost of rising interest rates on liabilities.
C. They pass the risk of interest rate changes onto borrowers.
D. In rising interest rate environments, borrowers may find themselves unable to pay the interest on their floating-rate loans.
E. The loan rate can be periodically adjusted according to a formula.
Q:
All other things equal, longer term loans are more likely to be
A. variable-rate loans.
B. fixed-rate loans.
C. commitment loans.
D. lowest risk category loans.
E. high interest rate loans.
Q:
From the perspective of an FI, which of the following is an advantage of a floating-rate loan?
A. Stable interest payments will be received throughout the loan period.
B. The pre-specified interest rate remains in force over the loan contract period no matter what happens to market interest rates.
C. The bank can request repayment of a loan at any time in the contract period.
D. The default risk is completely eliminated.
E. The interest rate risk is transferred to the borrower.
Q:
Which of the following observations is true of a spot loan?
A. It involves a maximum size and a maximum period of time over which the borrower can withdraw funds.
B. It involves immediate withdrawal of the entire loan amount by the borrower.
C. It is an unsecured short-term debt instrument issued by corporations.
D. It is a nonbank loan substitute.
E. It is a line of credit.
Q:
Which of the following is not a characteristic of a loan commitment?
A. The maximum amount of the loan is negotiated at the time of the loan agreement.
B. The interest rate on fixed-rate loans is determined at the time of the loan is actually taken down.
C. Floating-rate loans transfer the interest rate risk to the borrower.
D. The time period for which the loan is available is negotiated at the time of the loan agreement.
E. In a floating-rate loan the borrower pays interest rate in force when the loan is actually taken down.
Q:
The traditional duration equation can be used to measure the capital at risk on the loan.
Q:
A major problem in estimating RAROC is the measurement of loan risk.
Q:
RAROC is a measure of a firm's cost of debt.
Q:
The payoff function of a loan to a debt holder is similar to writing a call option on the value of the borrower's assets with the face value of the debt as the exercise price.
Q:
One of the problems with estimating expected default rates is that the analysis is based on historic data.
Q:
The marginal mortality rate is the probability of a bond or loan defaulting in any given year after it is issued.
Q:
The mortality rate is the past default experience of all loans, regardless of quality.
Q:
The condition of no arbitrage profits implies that profits cannot be made without taking some risk.
Q:
The cumulative default probability of a borrower in a given time period is one minus the product of the marginal default probabilities for all time periods up to that time period.
Q:
The probability that a borrower would default in any specific time period is a marginal default probability.
Q:
The risk premium, or spread, between corporate bonds and Treasury securities tends to increase as the time to maturity increases.
Q:
In terms of rating agencies such as S&P, investment grade companies are those whose bond ratings are grade B or above.
Q:
Discriminant models often ignore hard-to-quantify factors in the credit decision.
Q:
A major advantage of discriminant models is the stability of the coefficient weights over time.
Q:
Credit scoring models are advantageous because of their ability to sort borrowers into different default risk classes.
Q:
Willingness to post collateral may be a signal of more rather than less credit risk on the part of the borrower.