Chapter 11 Flashcards

1
Q

what is loan migration matrix

A

reflects credit rating of loans and measures probability of loan upgrading or downgrading over time

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2
Q

what is concentration limit analysis

A

rules set by banks to control how much money can be loaned to a single borrower

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3
Q

what is large exposure limit analysis

A

a way for banks to monitor the amount of risk they have with any single borrower

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4
Q

what is the difference between concentration and exposure limit analysis

A

concentration: focuses on category/ certain sectors (real estate)
large exposure: focuses on company (large borrowers)

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5
Q

what is concentration limit formula

A

= max loss as% of capital * (1/loss rate)

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6
Q

what is minimum risk portfolio

A

combination of assets that gives you lowest risk possible while still earning a return

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7
Q

what is the formula for return of a loan

A

= (spread + fee) - (prob of default * potential loss cap)

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8
Q

what is the formula for a risk (SD)of a loan

A

= sqrt (prob of default * probability of not defaulting) * (potential loss cap)

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9
Q

what is the ERP formula

A

= (probability of A)(ER A) + (probability of B)(ER B)

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10
Q

what is the risk portfolio formula

A

= sqrt( ((probability of A)(SD A))^2 + ((probability of B)(SD B))^2 + 2(probability A)(probability B)(correlation)(SD A)(SD B))

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11
Q

what are 5 different ways to tell which loan is more risky

A

-less spread
-less probability of default
-less fees
-less probability loss of capital
-lower SD

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12
Q

defend modern portfolio theory

A

suggests diversifying assets, higher risk with lower risk, when one is down the other might offset losses (low correlation)

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