fin 461 - exam 2 review Questions with Solutions
From the perspective of an FI, which of the following is an advantage of a floating-rate
loan?
a. Stable interest payments will be received throughout the loan period.
b. The pre-specified interest rate remains in force over the loan contract period no
matter what happens to market interest rates.
c. The bank can request repayment of a loan at any time in the contract period.
d. The default risk is completely eliminated.
e. The interest rate risk is transferred to the borrower. - -e. The interest rate risk is
transferred to the borrower.
Saunders - Chapter 10 - Credit Risk - Individual Loan Risk
-Which of the following is not a qualitative factor in credit risk analysis?
A. Borrower reputation.
B. Borrower ethnic origin.
C. Leverage position of the borrower.
D. The level of interest rates.
E. Collateral available. - -B. Borrower ethnic origin.
Saunders - Chapter 10 - Credit Risk - Individual Loan Risk
-What refers to the risk that the borrower is unable or unwilling to fulfill the terms
promised under the loan contract?
A. Liquidity risk.
B. Interest rate risk.
C. Sovereign risk.
D. Default risk.
E. Solvency risk. - -D. Default risk.
Saunders - Chapter 10 - Credit Risk - Individual Loan Risk
-In making credit decisions, which of the following items is considered a market-specific
factor?
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. - -B.
Whether the relative level of interest rates will encourage the borrower to take
excessive risks.
-Cumulative default probability refers to
A. probability that a borrower will default over a specified multi-year period.
B. expected maximum change in the loan rate due to a change in the risk factor on
the loan.
C. historic default rate experience of a bond or loan.
D. expected maximum change in the loan rate due to a change in the credit premium.
E. probability that a borrower will default in any given year. - -A. probability that a
borrower will default over a specified multi-year period.
-Which of the following refers to the term "mortality rate"?
A. The success rate of new investments.
B. A one-period rate of interest expected on a bond issued at some date in the future.
C. The probability that a borrower will default in any given year.
D. Historic default rate experience of a bond or loan.
E. The probability that a borrower will default over a specified multi-year period. - -D.
Historic default rate experience of a bond or loan.
-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=1.2X1+1.4X2 +3.3X3 +0.6X4 +1.0X5
Suppose X3 = 0.2 instead of -0.30. According to Altman's credit scoring model, the firm
would fall under which default risk classification?
A. A high default risk firm.
B. An indeterminant default risk firm.
C. A low default risk firm.
D. A medium default risk firm.
E. Either B or D. - -C. A low default risk firm.
-See information for Mortality Rate of Loans.What is the cumulative mortality rate of the A-
rated and B-rated loans for year 2?
A. 1.0 percent and 2.24 percent.
B. 0.5 percent and 1.24 percent.
C. 1.0 percent and 1.74 percent.
From the perspective of an FI, which of the following is an advantage of a floating-rate
loan?
a. Stable interest payments will be received throughout the loan period.
b. The pre-specified interest rate remains in force over the loan contract period no
matter what happens to market interest rates.
c. The bank can request repayment of a loan at any time in the contract period.
d. The default risk is completely eliminated.
e. The interest rate risk is transferred to the borrower. - -e. The interest rate risk is
transferred to the borrower.
Saunders - Chapter 10 - Credit Risk - Individual Loan Risk
-Which of the following is not a qualitative factor in credit risk analysis?
A. Borrower reputation.
B. Borrower ethnic origin.
C. Leverage position of the borrower.
D. The level of interest rates.
E. Collateral available. - -B. Borrower ethnic origin.
Saunders - Chapter 10 - Credit Risk - Individual Loan Risk
-What refers to the risk that the borrower is unable or unwilling to fulfill the terms
promised under the loan contract?
A. Liquidity risk.
B. Interest rate risk.
C. Sovereign risk.
D. Default risk.
E. Solvency risk. - -D. Default risk.
Saunders - Chapter 10 - Credit Risk - Individual Loan Risk
-In making credit decisions, which of the following items is considered a market-specific
factor?
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. - -B.
Whether the relative level of interest rates will encourage the borrower to take
excessive risks.
-Cumulative default probability refers to
A. probability that a borrower will default over a specified multi-year period.
B. expected maximum change in the loan rate due to a change in the risk factor on
the loan.
C. historic default rate experience of a bond or loan.
D. expected maximum change in the loan rate due to a change in the credit premium.
E. probability that a borrower will default in any given year. - -A. probability that a
borrower will default over a specified multi-year period.
-Which of the following refers to the term "mortality rate"?
A. The success rate of new investments.
B. A one-period rate of interest expected on a bond issued at some date in the future.
C. The probability that a borrower will default in any given year.
D. Historic default rate experience of a bond or loan.
E. The probability that a borrower will default over a specified multi-year period. - -D.
Historic default rate experience of a bond or loan.
-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=1.2X1+1.4X2 +3.3X3 +0.6X4 +1.0X5
Suppose X3 = 0.2 instead of -0.30. According to Altman's credit scoring model, the firm
would fall under which default risk classification?
A. A high default risk firm.
B. An indeterminant default risk firm.
C. A low default risk firm.
D. A medium default risk firm.
E. Either B or D. - -C. A low default risk firm.
-See information for Mortality Rate of Loans.What is the cumulative mortality rate of the A-
rated and B-rated loans for year 2?
A. 1.0 percent and 2.24 percent.
B. 0.5 percent and 1.24 percent.
C. 1.0 percent and 1.74 percent.
