Credit Risk Management MC past paper

A financial institution makes loans to many different firms which have very different creditworthiness. In doing so it takes into account the repayment performance of all firms in the same risk class. Which of the following is correct? By taking into account the differential riskiness of borrowers, the lender is: A. maximising profits. B. using risk pricing. C. taking unacceptable risks. D. creating loan hot spots.

Which of the following is correct? A. A firms shareholders would never want a firm to take on a project with a negative NPV. B. Afirms debtholderswould neverwant a firmto take on a project with a negative NPV. C. A firms shareholders might want a firm to take on a project with a negative NPV. D. A firms debtholders might want a firm to take on a project with a negative NPV.

Which of the following techniques involves a knowledge model for credit risk assessment? A. An analyst uses his judgement on a credit to determine the firms acceptability for lending purposes. B. A statistical model is used by a bank to determine the acceptability of applicants for a bank loan. C. Moodys-KMV applies a contingent claim valuation approach to determine a firms probability of default. D. All of A, B, and C are knowledge models.

What is meant by credit migration? A. The tendency of poor credits to switch suppliers on a regular basis. B. The change in creditworthiness of a particular credit over time. C. The trend over the last few years for banks and other lenders to make use of external credit rating agencies to assess creditworthiness. D. Changes, as a result of improvements to modelling techniques, in the way credit risk is being assessed.

The next two questions use the following information. Spot interest rates are given below. Year Interest rate in percent 1 6.1 2 5.8 3 5.1

What is the two-year forward interest rate in one years time?

We have a three-year bond with a coupon rate of 6 per cent. What will be the bonds forward price in one years time (that is, when it has 2 years left before redemption) as a percentage of par (100)?

What is meant by ultra vires in a credit assessment? A. It is a legal term which, in special circumstances, allows the lender to accelerate a borrowers default. B. It means the counterparty to a transaction does not have the legal right to enter into the contract. C. It means the party owed money in a defaulted transaction does not have the legal right to recover the money it is owed. D. It means a party has provided credit without undertaking the appropriate due diligence.

Which of the following ratios is an example of an activity ratio? A. Current ratio. B. Debt-to-equity ratio. C. Return on equity ratio. D. Total asset turnover ratio.

Which of the following restrictive covenants are not likely to be present in junk bonds? I. Limitations on debt II. Anti merger provisions III. Restrictions on investment A. I only. B. II only. C. III only. D. None of I, II or III are likely to be present.

Which of the following is the most likely outcome for a firm in financial distress? A. Chapter 7 bankruptcy. B. Chapter 11 bankruptcy. C. Private workout. D. The firm is acquired.

Which of the following statements is correct? The zone of insolvency is when the A. shares fall below their nominal value. B. managers have to balance carefully the competing claims of debt and equity. C. managers owe a fiduciary duty to the shareholders. D. managers owe a fiduciary duty to the debt claimants.

The following information is used for questions 12 and 13. Year 1 2 3 4 Number of loans 100 000 99 087 98 123 97 095 Number of defaults 913 964 1028 1093

What is the marginal mortality rate (in per cent) for year 3? A. 1.028 per cent. B. 1.048 per cent. C. 2.905 per cent. D. 2.934 per cent.

What is the cumulative 4-year mortality rate (in per cent) for year 4? A. 4.060 per cent. B. 3.999 per cent. C. 2.905 per cent. D. 1.057 per cent.

Why should a credit analyst be concerned with the causes of corporate failure? A. This is because such causes determine the credit risk of the firm being analysed. B. This is because such causes will be evident in the information being analysed. C. This is because the underlying cause of corporate failure is a lack of cash. D. The credit analyst should not be concerned with the causes of corporate failure.

Why is cash flow analysis an element of the 6Cs of credit approach? A. Cash flow analysis forms part of the audited financial statements provided by firms when seeking credit. B. Cash flow analysis determines the profitability of the credit opportunity. C. Cash flow determines the capacity of the credit to meet its future obligations. D. This is wrong; there is no cash flow analysis in the 6Cs approach.

The CAMPARI and ICE analytic template is used by many financial institutions as a way of evaluating the potential attractiveness of lending opportunities. The model examines both risk and reward from the lending decision. Which of the following is correct? A. CAMPARI relates to the risk and ICE relates to the assessment of the rewards. B. CAMPARI relates to the rewards and ICE relates to the assessment of the risks. C. The model mixes those elements of risk and reward between both CAMPARI and ICE. D. There is no assessment of rewards in the model and it only relates to the risks involved in the lending decision.

Which of the following is correct? When using linear discriminant analysis against logistic regression we find that: A. discriminant analysis is better at distinguishing credit quality than logistic regression. B. logistic regression is better at distinguishing credit quality than discriminant analysis. C. both models give identical results for middle range values but different predictions for high and low range values. D. both models give identical results.

What does it mean to create a provision for a bad and doubtful debt? A. It is an accounting entry to record the loss from an unpaid invoice made under a line of credit and where the prospect of payment is remote. B. All invoices past their due date are considered to be a potential loss and an accounting entry is made to record this fact. C. When firms first start offering trade credit, then they automatically set up an accounting entry for bad and doubtful debts since some invoices will not ultimately be paid. D. All of A, B and C apply