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1. Which one of the following four statements correctly defines credit risk?

2. A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.

3. To estimate the interest charges on the loan, an analyst should use one of the following four formulas:

4. Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Hence, the loss rate in this case will be

5. Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.

What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?

6. Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.

What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?

7. Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD $1 million loan to the Delta Industrial Machinery

Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of default increases from 2% to 10% and the loss given default increases from 50% to 75%.

If Alpha Bank can reprice the loan, what should the new rate be?

8. Which one of the following four model types would assign an obligor to an obligor class based on the risk characteristics of the borrower at the time the loan was originated and estimate the default probability based on the past default rate of the members of that particular class?

9. Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises?

10. A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default. Hence, the credit associate must estimate the probability of default based on the assumptions about the applicability of the following tendency to this lending situation:

11. A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to:

12. The potential failure of a manufacturer to honor a warranty might be called ____, whereas the

potential failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___.

13. Which one of the following four options does NOT represent a benefit of compensating balances to the bank?

14. According to a Moody's study, the most important drivers of the loss given default historically have been all of the following EXCEPT:

I. Debt type and seniority

II. Macroeconomic environment

III. Obligor asset type

IV. Recourse

15. A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year.

What is the expected duration for this three-year loan?

16. Of all the risk factors in loan pricing, which one of the following four choices is likely to be the least significant?

17. By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:

18. In the United States, which one of the following four options represents the largest component of securitized debt?

19. From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:

I. Duration

II. Loss given default

III. Interest rates

IV. Bank spreads

20. Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:

21. Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:

22. All of the following performance statistics typically benefit country's creditworthiness EXCEPT:

23. A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.

24. Which one of the following four statements regarding counterparty credit risk is INCORRECT?

25. A credit risk analyst is evaluating factors that quantify credit risk exposures.

The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:

26. Which one of the following four options correctly identifies the core difference between bonds and loans?

27. Which one of the following four formulas correctly identifies the expected loss for all credit instruments?

28. Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%.

In this case, what will the bank's exposure at default (EAD) be?

29. Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%.

In this case, what will the bank's expected loss be?

30. Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be?

What is the expected loss of this loan?

31. Which of the following attributes are typical for early models of statistical credit analysis?

32. A credit analyst wants to determine if her bank is taking too much credit risk.

Which one of the following four strategies will typically provide the most convenient approach to quantify the credit risk exposure for the bank?

33. When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.

34. Which one of the following four statements regarding bank's exposure to credit and default risk is INCORRECT?

35. To manage its credit portfolio, Beta Bank can directly sell the following portfolio elements:

I. Bonds

II. Marketable loans

III. Credit card loans

36. As DeltaBank explores the securitization business, it is most likely to embrace securitization to:

I. Bring transparency to the bank's balance sheet

II. Create a new profit center for the bank

III. Strategically release risk capital and regulatory capital for redeployment

IV. Generate cash for additional debt origination

37. After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.

38. Which of the following risk types are historically associated with credit derivatives?

I. Documentation risk

II. Definition of credit events

III. Occurrence of credit events

IV. Enterprise risk

39. The pricing of credit default swaps is a function of all of the following EXCEPT:

40. To safeguard its capital and obtain insurance if the borrowers cannot repay their loans, Gamma Bank accepts financial collateral to manage its credit risk and mitigate the effect of the borrowers' defaults.

Gamma Bank will typically accept all of the following instruments as financial collateral EXCEPT?