Question 1

All other things equal, longer term loans are more likely to be

Accepted Answer

A)  variable-rate loans.
B)  fixed-rate loans.
C)  commitment loans.
D)  lowest risk category loans.
E)  high interest rate loans.F) A) and E)
G) B) and E)

Question 2

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm?

Accepted Answer

A)  Less than 1.
B)  1.
C)  Between 1 and 1.81.
D)  Between 1.81 and 2.99.
E)  Greater than 2.99.F) All of the above
G) B) and C)

Question 3

RAROC is a measure of a firm's cost of debt.

Accepted Answer

A) True 
 B)False

Question 4

Discriminant models often ignore hard-to-quantify factors in the credit decision.

Accepted Answer

A) True 
 B)False

Question 5

Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = 0.30
X2 = 0
X3 = -0.30
X4 = 0.15
X5 = 2.1
Altman's discriminant function takes the form:
Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5
According to Altman's credit scoring model, this firm should be considered

Accepted Answer

A)  a high default risk firm.
B)  an indeterminant default risk firm.
C)  a low default risk firm.
D)  a lowest risk customer.
E)  Either a low default risk firm or a lowest risk customer.F) A) and B)
G) B) and C)

Question 6

Borrower reputation is important in assessing credit quality because

Accepted Answer

A)  good past payment performance perfectly predicts future behavior.
B)  preservation of a good customer/FI relationship acts as an additional incentive to encourage loan repayment.
C)  FIs only lend to customers they know.
D)  customers with poor credit histories always default on their loans.
E)  a reputation for honesty is important in credit appraisal.F) C) and D)
G) All of the above

Question 7

In making credit decisions, which of the following items is considered a market-specific factor?

Accepted Answer

A)  Whether the borrower's capital structure is beyond the point where additional debt increases the probability of loss of principal or interest.
B)  Whether the relative level of interest rates will encourage the borrower to take excessive risks.
C)  Whether property can be pledged as collateral.
D)  Whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk.
E)  Whether the record of the borrower is sufficient to create an implicit contract.F) A) and E)
G) C) and D)

Question 8

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) :  The cumulative probability of repayment of BBB corporate debt over the next two years is

Accepted Answer

A)  99.84 percent.
B)  92.10 percent.
C)  4.45 percent.
D)  95.70 percent.
E)  7.90 percent.F) B) and C)
G) A) and B)

Question 9

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) :  Calculate the value of y (the implied forward rate on one-year maturity BBB corporate debt to be delivered in one year) .

Accepted Answer

A)  6.53 percent.
B)  10.83 percent.
C)  5.75 percent.
D)  6.925 percent.
E)  1.017 percent.F) A) and E)
G) A) and D)

Question 10

The traditional duration equation can be used to measure the capital at risk on the loan.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements does NOT reflect credit decisions at the retail level?

Accepted Answer

A)  Loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions.
B)  Most loan decisions at the retail level tend to be accept or reject decisions.
C)  Mortgage loans often are discriminated based on loan to price ratios rather than interest rates.
D)  Household borrowers require higher costs of information collection for lenders.
E)  Retail loans tend to be smaller than wholesale loans.F) All of the above
G) A) and B)

Question 12

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Accepted Answer

A)  the lower the current level of interest rates, the higher the RAROC.
B)  the lower the expected change in risk premium, the lower the RAROC.
C)  the higher the expected change in risk premium, the higher the RAROC.
D)  the higher the loan amount, the lower the RAROC.
E)  the lower the loan amount, the lower the RAROC.F) D) and E)
G) A) and C)

Exam 10: Credit Risk: Individual Loans

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm?

Correct Answer
verified

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : Calculate the value of y (the implied forward rate on one-year maturity BBB corporate debt to be delivered in one year) .

Correct Answer
verified

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Correct Answer
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RAROC is a measure of a firm's cost of debt.

Correct Answer
verified

Which of the following statements does NOT reflect credit decisions at the retail level?

Correct Answer
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Correct Answer
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The traditional duration equation can be used to measure the capital at risk on the loan.

Correct Answer
verified

All other things equal, longer term loans are more likely to be

Correct Answer
verified

Discriminant models often ignore hard-to-quantify factors in the credit decision.

Correct Answer
verified

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : The cumulative probability of repayment of BBB corporate debt over the next two years is

Correct Answer
verified

In making credit decisions, which of the following items is considered a market-specific factor?

Correct Answer
verified

Borrower reputation is important in assessing credit quality because

Correct Answer
verified

Exam 10: Credit Risk: Individual Loans

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm?

Correct AnswerverifiedShow Answer

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : Calculate the value of y (the implied forward rate on one-year maturity BBB corporate debt to be delivered in one year) .

Correct AnswerverifiedShow Answer

Which of the following completes the statement: All else equal, the higher the duration of a loan,

Correct AnswerverifiedShow Answer

RAROC is a measure of a firm's cost of debt.

Correct AnswerverifiedShow Answer

Which of the following statements does NOT reflect credit decisions at the retail level?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The traditional duration equation can be used to measure the capital at risk on the loan.

Correct AnswerverifiedShow Answer

All other things equal, longer term loans are more likely to be

Correct AnswerverifiedShow Answer

Discriminant models often ignore hard-to-quantify factors in the credit decision.

Correct AnswerverifiedShow Answer

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : The cumulative probability of repayment of BBB corporate debt over the next two years is

Correct AnswerverifiedShow Answer

In making credit decisions, which of the following items is considered a market-specific factor?

Correct AnswerverifiedShow Answer

Borrower reputation is important in assessing credit quality because

Correct AnswerverifiedShow Answer

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