MCQ Risk - Chapter 4 Flashcards
The BIS recommends that banks could carry out stress testing for each of the following areas apart from which one?
A
Liquidity conditions
B
Market risk events
C
Impairment provisioning
D
Interest rate movements
Explanation - Correct Answer: C
C - Impairment provisioning will need to be undertaken by banks but this is not a specific BIS recommendation. Loan impairment will result in a loss for the lending firm, and the firm therefore needs to set aside an allowance for this loss in its accounts
Which of the following best describes the credit spread of a bond?
A
The downgrade of a firm’s credit rating leading to increased borrowing costs
B
The difference between the interest rate a firm pays when it borrows and the interest rate on a default-free security
C
The charge made by credit ratings agencies for publishing credit ratings
D
The initial fee paid by a borrower when issuing securities
The difference between the interest rate a firm pays when it borrows and the interest rate on a default-free security
Of the credit ratings listed below, which of the following is the lowest credit rating?
A
Caa
B
C
C
Ca
D
CCC
Explanation - Correct Answer: B
In order from highest to lowest rating: Caa and CCC (same rating from different agencies); then Ca; then C.
How is diversification BEST achieved?
A
By lending to organisations across similar industrial sectors that have the lowest possible default correlations
B
By lending to organisations across different industrial sectors that have the highest possible default correlations
C
By lending to organisations across different industrial sectors that have the lowest possible default correlations
D
By lending to many different organisations within the same industrial sector regardless of default correlations
Explanation - Correct Answer: C
Diversification is best achieved by lending to organisations across different industrial sectors which have the lowest possible default correlations.
An organisation may manage credit risk at the individual level by using which of the following techniques?
A
Netting
B
Diversification
C
Asset securitisation
D
Loan sales
Explanation - Correct Answer: A
Diversification, asset securitisation, and loan sales reduce credit risk at the portfolio level, not the individual level.
The credit risk function within an investment bank would be responsible for implementing a credit risk management policy. All of the following are part of implementing that policy EXCEPT:
A
Disenfranchising the trading areas of decisions on granting credit to clients
B
Ensuring that the various systems used by the bank’s settlement area are fully integrated
C
Ensuring the firm’s credit risk policy dovetails with the general business strategy
D
Analysing counterparties’ credit on many different levels
Explanation - Correct Answer: B
The Credit Risk Function would not be responsible for ensuring that the various systems used by the bank’s settlement area are fully integrated. In many firms they are not integrated. To do so would be a major cost and undertaking. Such a decision might be taken at board level.
Which one of the following statements regarding credit ratings is false?
A
Credit ratings are given with a short term outlook
B
The lowest credit rating given by Standard and Poor’s is ‘D’
C
Some agencies have not downgraded companies promptly enough
D
They can be used as a tool to manage credit exposure
Credit ratings are given with a short term outlook
Which of the following factors is least likely to be taken into account when a credit rating agency issues a rating relating to a particular company?
A
The length of time it has been trading
B
Its competitiveness within its industry
C
The expected growth of its industry
D
The quality of the company’s management
Explanation - Correct Answer: A
A - The length of time a company has been trading is not a main consideration that credit rating agencies will take into account when deciding the actual rating.
The BIS recommends that banks could carry out stress testing for each of the following areas apart from which one?
A
Liquidity conditions
B
Market risk events
C
Impairment provisioning
D
Interest rate movements
Explanation - Correct Answer: C
C - Impairment provisioning will need to be undertaken by banks but this is not a specific BIS recommendation. Loan impairment will result in a loss for the lending firm, and the firm therefore needs to set aside an allowance for this loss in its accounts.
In order to identify counterparty issues which need to be referred to senior management, a firm must decide:
What criteria to use so as to pick the right issues
How all associated risks are to be identified
Who has responsibility for approving the firms credit risk strategy
Which counterparties to scrutinize
What criteria to use so as to pick the right issues
Credit migration probabilities are used in the control of which type of risk?
Trading book
A firms credit risk function is responsible for?
Ensuring credit risk is properly managed
