Question 1

12-21 Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?

Accepted Answer

A)  Migration analysis.
B)  Concentration limits.
C)  Loan loss ratio-based model.
D)  KMV portfolio manager model.
E)  Loan volume-based model.F) A) and B)
G) B) and E)

Question 2

12-39 Identify the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk.

Accepted Answer

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) .F) B) and E)
G) A) and B)

Question 3

12-60 What is the expected return on the loan using the KMV model?

Accepted Answer

A)  6.50 percent.
B)  5.50 percent.
C)  6.00 percent.
D)  14.0 percent.
E)  13.5 percent.F) C) and D)
G) A) and B)

Question 4

12-35 In the KMV portfolio model,the expected return on a loan is the

Accepted Answer

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.F) A) and E)
G) C) and D)

Question 5

12-18 Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the entire loan population.

Accepted Answer

A) True 
 B)False

Question 6

12-29 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

Accepted Answer

A)  expected return on each loan to a borrower.
B)  risk of each loan 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.F) A) and D)
G) All of the above

Question 7

12-57 Estimate the standard deviation of Bank A's asset allocation proportions relative to the national benchmark.

Accepted Answer

A)  15.00 percent.
B)  21.21 percent.
C)  29.89 percent.
D)  34.32 percent.
E)  40.44 percent.F) A) and B)
G) A) and C)

Question 8

12-22 Migration analysis is a tool to measure credit concentration risk and refers to

Accepted Answer

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.F) C) and D)
G) A) and C)

Question 9

12-48 What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated ( ρ\rhoρ  = 0) ?

Accepted Answer

A)  1.41 percent.
B)  1.63 percent.
C)  0.93 percent.
D)  3.57 percent.
E)  1.18 percent. F) A) and E)
G) C) and E)

Question 10

12-44 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?

Accepted Answer

A)  CreditMetrics.
B)  Credit Risk +.
C)  Loan loss ratio-based model.
D)  KMV portfolio manager model.
E)  Loan volume-based model.F) A) and B)
G) None of the above

Question 11

12-1 The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.

Accepted Answer

A) True 
 B)False

Question 12

12-31 A study by Citibank of 831 defaulted corporate loans and 89 asset-based loans found that,on average,an FI can expect to recover approximately

Accepted Answer

A)  36 percent of the loan.
B)  63 percent of the loan.
C)  80 percent of the loan.
D)  90 percent of the loan.
E)  only the market value of collateral securing the loan.F) A) and C)
G) B) and D)

Question 13

12-24 A weakness of migration analysis to evaluate credit concentration risk is that the

Accepted Answer

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.F) B) and C)
G) A) and B)

Question 14

12-54 What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?

Accepted Answer

A)  5 percent.
B)  10 percent.
C)  15 percent.
D)  20 percent.
E)  25 percent.F) A) and C)
G) A) and E)

Question 15

12-16 The all-in-spread (AIS)used in the KMV model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.

Accepted Answer

A) True 
 B)False

Question 16

12-41 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?

Accepted Answer

A)  Loss rate.
B)  Systematic loan loss risk.
C)  Concentration limit.
D)  Loss given default.
E)  Expected default frequency.F) A) and B)
G) A) and E)

Question 17

12-10 One advantage of portfolio diversification methods is that they are applicable to all FIs,regardless of their size.

Accepted Answer

A) True 
 B)False

Question 18

12-32 As part of measuring unobservable default risk between borrowers,of The KMV model decomposes asset returns into

Accepted Answer

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.F) A) and E)
G) A) and D)

Question 19

12-9 Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.

Accepted Answer

A) True 
 B)False

Question 20

12-61 What is the risk of the loan using the KMV model?

Accepted Answer

A)  4.75 percent.
B)  0.48 percent.
C)  6.89 percent.
D)  2.18 percent.
E)  1.50 percent.F) None of the above
G) C) and D)

Exam 12: Credit Risk: Loan Portfolio and Concentration Risk

12-31 A study by Citibank of 831 defaulted corporate loans and 89 asset-based loans found that,on average,an FI can expect to recover approximately

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12-57 Estimate the standard deviation of Bank A's asset allocation proportions relative to the national benchmark.

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12-35 In the KMV portfolio model,the expected return on a loan is the

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12-41 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?

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12-54 What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?

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12-22 Migration analysis is a tool to measure credit concentration risk and refers to

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12-1 The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.

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12-61 What is the risk of the loan using the KMV model?

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12-39 Identify the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk.

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12-18 Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the entire loan population.

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12-29 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

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12-10 One advantage of portfolio diversification methods is that they are applicable to all FIs,regardless of their size.

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12-16 The all-in-spread (AIS)used in the KMV model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.

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12-21 Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?

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12-32 As part of measuring unobservable default risk between borrowers,of The KMV model decomposes asset returns into

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12-48 What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated ( ρ\rhoρ = 0) ?

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12-24 A weakness of migration analysis to evaluate credit concentration risk is that the

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12-60 What is the expected return on the loan using the KMV model?

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12-9 Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.

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12-44 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?

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12-48 What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated ( $\rho$ = 0) ?

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