Question 1

12-45 A Hypothetical Rating Migration,or Transition Matrix,reflects all of the following EXCEPT

Accepted Answer

A)  rating at which the portfolio ended the year.
B)  transition probabilities.
C)  rating at which the portfolio of loans began the year.
D)  current ratings of portfolio.
E)  the average proportions of loans that began the year.F) C) and E)
G) A) and B)

Question 2

12-56 Suppose Kansas Bank wants to ensure that its maximum loss on a secured (collateralized) loan is 10 percent (as a percent of capital) .If it wishes to keep a concentration limit at 40 percent for secured loans,what is the estimated amount lost per dollar of defaulted secured loan?

Accepted Answer

A)  40 cents.
B)  35 cents.
C)  30 cents.
D)  25 cents.
E)  20 cents.F) B) and D)
G) A) and B) D

Question 3

12-53 The results can be interpreted as

Accepted Answer

A)  If the total loan losses of the bank measured as a percentage of total loans is 2 percent,the losses in the real estate sector,measured as a percentage of total loans,is 1.2 percent.
B)  If the total loan losses of the bank measured as a percentage of total loans is 2 percent,the losses in the commercial sector,measured as a percentage of total loans,is 3.2 percent.
C)  If the total loan losses of the bank measured as a percentage of total loans is 2 percent,the losses in the commercial sector,measured as a percentage of total loans,is 6.4 percent.
D)  If the total loan losses of the bank measured as a percentage of total loans is 3 percent,the losses in the commercial sector,measured as a Percentage of total loans,is 5.2 percent.
E)  If the total loan losses of the bank measured as a percentage of total loans is 3 percent,the losses in the real estate sector,measured as a percentage of total loans,is 4 percent.F) B) and C)
G) A) and E)

Question 4

12-46 Credit Risk + is a model developed by

Accepted Answer

A)  Standard & Poor's.
B)  Moody's.
C)  KMV Corporation
D)  Credit Suisse Financial Products (CSFP) .
E)  JP Morgan.F) A) and B)
G) B) and C)

Question 5

12-8 The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

Accepted Answer

A) True 
 B)False  False

Question 6

12-30 According to KMV,default correlations tend to be _____ and lie between _______.

Accepted Answer

A)  Low; 0.002 and 0.15
B)  High; 1.86 and 2.99
C)  Low; 0.001 and 0.002
D)  High; 2.99 and 3.50
E)  Low; 0 and 0.001F) B) and D)
G) None of the above

Question 7

12-5 In the past,data availability limited the use of sophisticated portfolio models to set concentration limits.

Accepted Answer

A) True 
 B)False

Question 8

12-17 The KMV model includes recovery rates on defaulted loans.

Accepted Answer

A) True 
 B)False

Question 9

12-12 Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.

Accepted Answer

A) True 
 B)False

Question 10

12-52 The results indicate that for the bank

Accepted Answer

A)  the real estate loan losses were systematically lower than the total loan losses.
B)  the real estate loan losses were systematically higher than the total loan losses.
C)  the commercial loan losses are systematically higher than the total loan losses.
D)  Answers A and C.
E)  Answers B and C.F) B) and C)
G) C) and D)

Question 11

12-15 Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.

Accepted Answer

A) True 
 B)False

Question 12

12-3 The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.

Accepted Answer

A) True 
 B)False

Question 13

12-19 Recent Federal Reserve policy for measuring credit concentration risk favors technical models over subjective analysis.

Accepted Answer

A) True 
 B)False  False

Question 14

12-14 Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.

Accepted Answer

A) True 
 B)False

Question 15

12-38 In the KMV model,this is a function of the historical returns of the stock returns of the individual assets.

Accepted Answer

A)  The risk of a loan.
B)  The expected default frequency.
C)  The loss given default.
D)  The correlation of default risk.
E)  The volatility of the loan's default rate.F) B) and D)
G) All of the above

Question 16

12-25 If the amount lost per dollar on a defaulted loan is 40 percent,then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to

Accepted Answer

A)  5 percent.
B)  15 percent.
C)  25 percent.
D)  30 percent.
E)  50 percent.F) None of the above
G) A) and B)

Question 17

12-59 Using standard deviations,which bank is in a better position if the average earnings on the assets of Bank A is 11 percent and Bank B is 12 percent (ignore all other factors) ?

Accepted Answer

A)  Bank B,because it earnings of 12 percent is higher than Bank A's 11 percent while,its standard deviation is lower.
B)  Bank B,because its earnings of 12 percent is higher compared to Bank A's 11 percent,while its standard deviation is higher.
C)  Bank B,because its earnings of 12 percent is higher compared to Bank A's 11 percent,while its standard deviation is the same.
D)  Bank A,because although its earnings of 11 percent is lower compared to Bank B's 12 percent,its standard deviation is significantly lower.
E)  Bank A,because although its earnings of 11 percent is lower compared to Bank A's 12 percent,its standard deviation is the same.F) C) and D)
G) A) and E)

Question 18

12-6 In the use of modern portfolio theory (MPT),the sum of the credit risks of loans under estimates the risk of the whole portfolio.

Accepted Answer

A) True 
 B)False

Question 19

12-20 General diversification limits established by life and property and casualty insurance regulators are based on the concepts of modern portfolio theory.

Accepted Answer

A) True 
 B)False

Question 20

12-42 Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?

Accepted Answer

A)  CreditMetrics.
B)  Credit Risk +.
C)  Loan loss ratio-based model.
D)  KMV portfolio manager model.
E)  Loan volume-based model.F) C) and E)
G) A) and B)

Exam 12: Credit Risk: Loan Portfolio and Concentration Risk

12-45 A Hypothetical Rating Migration,or Transition Matrix,reflects all of the following EXCEPT

Correct AnswerverifiedShow Answer

12-56 Suppose Kansas Bank wants to ensure that its maximum loss on a secured (collateralized) loan is 10 percent (as a percent of capital) .If it wishes to keep a concentration limit at 40 percent for secured loans,what is the estimated amount lost per dollar of defaulted secured loan?

Correct AnswerverifiedD

12-53 The results can be interpreted as

Correct AnswerverifiedShow Answer

12-46 Credit Risk + is a model developed by

Correct AnswerverifiedShow Answer

12-8 The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.

Correct AnswerverifiedFalse

12-30 According to KMV,default correlations tend to be _____ and lie between _______.

Correct AnswerverifiedShow Answer

12-5 In the past,data availability limited the use of sophisticated portfolio models to set concentration limits.

Correct AnswerverifiedShow Answer

12-17 The KMV model includes recovery rates on defaulted loans.

Correct AnswerverifiedShow Answer

12-12 Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.

Correct AnswerverifiedShow Answer

12-52 The results indicate that for the bank

Correct AnswerverifiedShow Answer

12-15 Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.

Correct AnswerverifiedShow Answer

12-3 The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.

Correct AnswerverifiedShow Answer

12-19 Recent Federal Reserve policy for measuring credit concentration risk favors technical models over subjective analysis.

Correct AnswerverifiedFalse

12-14 Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.

Correct AnswerverifiedShow Answer

12-38 In the KMV model,this is a function of the historical returns of the stock returns of the individual assets.

Correct AnswerverifiedShow Answer

12-25 If the amount lost per dollar on a defaulted loan is 40 percent,then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to

Correct AnswerverifiedShow Answer

12-59 Using standard deviations,which bank is in a better position if the average earnings on the assets of Bank A is 11 percent and Bank B is 12 percent (ignore all other factors) ?

Correct AnswerverifiedShow Answer

12-6 In the use of modern portfolio theory (MPT),the sum of the credit risks of loans under estimates the risk of the whole portfolio.

Correct AnswerverifiedShow Answer

12-20 General diversification limits established by life and property and casualty insurance regulators are based on the concepts of modern portfolio theory.

Correct AnswerverifiedShow Answer

12-42 Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?

Correct AnswerverifiedShow Answer

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False

12-30 According to KMV,default correlations tend to be _ and lie between ___.

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False

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