- All Exams Instant Download
A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default. Hence, the credit associate must estimate the probability of default based on the assumptions about the applicability of the following tendency to this lending situation:
A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default. Hence, the credit associate...
What is the portfolio VaR?
James Johnson has a $1 million long position in ThetaGroup with a VaR of 0.3 million, and $1 million long position in VolgaCorp with a VaR of 0.4 million. The returns of the two companies have zero correlation. What is the portfolio VaR?A . $1 millionB . $0.7 millionC ....
What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both...
Which one of the following four trading styles is she likely to use?
A trader attempts to hold long positions when markets are rising and hold short positions when markets are falling. Which one of the following four trading styles is she likely to use?A . Technical tradingB . Contrarian tradingC . Black box tradingD . Market timing tradingView AnswerAnswer: D Explanation: Market...
Which one of the following four statements about equity indices is INCORRECT?
Which one of the following four statements about equity indices is INCORRECT?A . Equity indices are numerical calculations that reflect the performance of hypothetical equity portfolios.B . Equity indices do not trade in cash form, rather, they are meant to track the overall performance of an equity market.C . Capitalization-weighted...
Which of the following statements defines Value-at-risk (VaR)?
Which of the following statements defines Value-at-risk (VaR)?A . VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.B . VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given...
In hedging transactions, derivatives typically have the following advantages over cash instruments:
In hedging transactions, derivatives typically have the following advantages over cash instruments: I. Lower credit risk II. Lower funding requirements III. Lower dealing costs IV. Lower capital chargesA . I, IIB . I, IIIC . II, IVD . I, II, III, IVView AnswerAnswer: D Explanation: Derivatives have several advantages over...
In this case, what will the bank's exposure at default (EAD) be?
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's exposure at default...
Securitization is the process by which banks
Securitization is the process by which banks I. Issue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets. II. Issue bonds where the bank has transferred its legal right to payment of interest and...
What are the add-on losses faced by a bank that is going bankrupt?
What are the add-on losses faced by a bank that is going bankrupt? I. The discount accepted by the bank for selling its assets in a fire sale. II. The increased cost of funding liabilities in a financially distressed situation. III. The reduction in the present value of future growth...
