RSK 4804 RSK4804 Assignment 01 memo

1 INTRODUCTION The purpose of this tutorial letter is to provide you with suggested answers to assignments, and give you guidelines for the examination. 2 SUGGESTED ANSWERS TO ASSIGNMENTS Question 1 Distinguish between credit risk assessment and credit risk measurement. (10) Suggested Answer Credit risk assessment Is a credit management process that seeks to identify and control risks by determining the borrower’s probability of repaying the debt√. Through credit analysis, an assessment is made of the borrower’s income, balance sheet, and cash flow statements, along with character, capacity, and capital adequacy, all of which are dependent upon data that are provided by the obligor√. The second goal of credit assessment is to identify a borrower’s primary source√ of debt repayment that will be available to repay an extended credit obligation. Similarly, the third goal of credit assessment is to evaluate the probability that a secondary repayment source will be available√ in the event that the primary source becomes unavailable. RSK4804/101 3 Credit risk measurement While credit risk assessment relies on borrower provided information, credit risk measurement relies on lender’s analytics and risk measurement tools√ rather than the borrower’s. Credit risk measurement also has three goals. The first goal is to limit the credit risk exposure√ that the lenders accept when extending the debt. By determining the probability of a loss and the loss exposure amount over a period of time, the debt facility can be better structured and managed√.