aianjie

 

AIM 4: Explain and compare the through-the-cycle and at-the-point approaches to score a company.

1、Which of the following internal rating credit systems develop ratings for long time horizons (more than one year)?

I.           At-the-point approach.

II.         Through-the-cycle approach.

A) II only.

B) I only.

C) I and II.

D) Neither I nor II.

aianjie

 

The correct answer is A

The at-the-point approach predicts credit quality over a relatively short horizon, while through-the-cycle methodology focuses on a long time horizon.

aianjie

 

2、Which of the following internal rating credit systems is more likely to be procyclical (i.e., tend to amplify the business cycle)?

At-the-point approach.

Through-the-cycle approach.

A) I only.

B) II only.

C) I and II.

D) Neither I nor II.

aianjie

 

The correct answer is Afficeffice" />

The at-the-point approach is more likely to be procyclical because of their short term focus. For example, if an economics downturn occurs the resulting downgrades can further decrease economic activity. In addition, changes in ratings and lending policies can lag the economic cycle, so just when the economy hits a trough and is about to start to expand, banks may downgrade firms and restrict access to credit they need.

 

aianjie

 

3、In comparing the horizons of through-the-cycle and at-the-point approaches of rating bonds:

A) through-the-cycle approaches have longer horizons.

B) the horizons are equal.

C) there is no set relationship.

D) at-the-point approaches have longer horizons.

aianjie

 

The correct answer is A

The purpose of through-the-cycle approaches is to have a longer horizon that averages out the effect of the business cycle.

aianjie

 

4、At-the-point approaches tend to be:

A) countercyclical.

B) neither counter- nor procyclical because they rarely change.

C) neither counter- nor procyclical because they change randomly. 

D) procycyclical.

aianjie

 

The correct answer is D

Banks often downgrade a bond or company just as it has reached a trough in the cycle, and this restricts the credit to the company just when it could use it to resume growth. Also, banks will upgrade a company near an economic peak and extend it more credit just when the firm should be expecting slower growth.

aianjie

 

AIM 5: Explain how internal ratings models may create a procyclicality effect.

1、Internal ratings by banks tend to:

A) lag behind the economic cycle.

B) predict the economic cycle.

C) coincide with the economic cycle.

D) be unrelated to the economic cycle.

aianjie

 

The correct answer is A

One of the problems with internal ratings is that banks tend to lag in updating and changing the ratings.