aianjie

 

5、Bank A has extended a commitment of $10,000,000 and assessed a probability of default of 5%. The loss given default based on historical data is estimated to be 30%. Bank B has extended a $5,000,000 commitment to a company with a lower credit quality. A default rate of 10% and loss given default of 20% is estimated. For Bank A to have a lower expected loss than Bank B, which of the following is TRUE? The recovery rate of:

A) Bank B’s loan will decrease to 90%.

B) Bank B’s loan will increase to 80%.

C) Bank A’s loan will increase to 90%.

D) Bank A’s loan will decrease to 80%.

aianjie

 

The correct answer is C

Expected loss = AE × LGD × PD.

ELA = $10M × 5% × 30% = $150,000.

ELB = $5M × 10% × 20% = $100,000.

Bank A and Bank B have initial recovery rates of 70% and 80%, respectively. A decrease in Bank A’s loan to 80% is incorrect since 80% would be an increase in recovery rate. When recovery rate of Bank A increases to 90%, ELA = $10M × 5% × 10% = $50,000.

aianjie

 

6、For a given loan portfolio, which of the following will unambiguously increase expected loss?

A) Decrease recovery rate and increase probability of default.

B) Increase recovery rate and increase probability of default.

C) Decrease recovery rate and decrease probability of default.

D) Increase recovery rate and decrease probability of default.

aianjie

 

The correct answer is A

Increasing the recovery rate and decreasing the probability of default will decrease expected loss. Decreasing/increasing the recovery rate and decreasing/increasing the probability of default are ambiguous. Decreasing recovery rates AND increasing the probability of default will definitely increase expected loss.

aianjie

 

7、For a given loan portfolio, which of the following will NOT increase expected loss?

A) Decrease recovery rate and decrease probability of default.

B) Increase recovery rate and increase probability of default.

C) Decrease recovery rate and increase probability of default.

D) Increase recovery rate and decrease probability of default.

aianjie

 

The correct answer is D

Decreasing the recovery rate and increasing the probability of default will increase expected loss. Decreasing/increasing the recovery rate and decreasing/increasing the probability of default may increase or decrease expected loss depending on the relative change in the factors. Finally, increasing the recovery rate and decreasing the probability of default will unambiguously DECREASE expected loss.

 

aianjie

 

AIM 12: Describe how to parameterize credit risk models.

Which of the following is (are) NOT a disadvantage to parameterizing a credit risk model?

I.           Private borrowers can cross-check with public credit rating agencies.

II.         Internal loss estimates are biased estimators of external loan losses.

III.        Outstandings and commitments are typically observable.

A) I only.

B) I and II only.

C) III only.

D) II and III only.

aianjie

 

The correct answer is C

Statement I is incorrect because private borrowers cannot cross check with public rating agencies. Statement II is a disadvantage to parameterizing credit risk models since any one bank only views its own loss history and not the population of loan losses. Statement III is correct and so the observable nature of commitments outstandings is a straightforward factor to parameterize.

alexbao

3x3x3x3xx3