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

 

2、Identify the effect of decreasing adjusted exposure on expected loss.

A) Decrease.

B) No effect.

C) Increase.

D) LGD is not a component of expected loss.

aianjie

 

The correct answer is A

Expected loss is calculated as follows: EL = AE × LGD × EDF. Therefore, decreasing AE will directly decrease expected loss.

aianjie

 

3、If the adjusted exposure for Bank X is $15 million, the probability of default is 2%, and the recovery rate is 20%, what is the expected loss for Bank X?

A) $60,000.

B) $300,000.

C) $3,000,000.

D) $240,000.

aianjie

 

The correct answer is

We can calculate the expected loss as follows.

EL = AE × EDF × LGD

EL = ($15,000,000) × (0.02) × (0.80)

= $240,000.

aianjie

 

The correct answer is C

The commitment fee gives the borrower the right, but not the obligation, to draw down on the commitment at any time.

aianjie

 

AIM 11: Define, calculate and interpret the expected loss on a loan.

1、Identify the effect of increasing LGD on expected loss.

A) No effect.

B) Increase.

C) Decrease.

D) LGD is not a component of expected loss.

aianjie

 

The correct answer is B

Expected loss is calculated as follows: EL = AE × LGD × EDF. Therefore, increasing LGD directly increases expected loss.

aianjie

 

AIM 7: Explain how covenants change the impact of exposures.

To estimate recovery rates from credit risk models, which of the following is required?

A) Analysis of covenants to determine asset seniority.

B) Analysis of covenants to determine asset uniqueness.

C) Collateral value but no analysis of covenants.

D) Liquidity of collateral but no analysis of covenants.