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AIM 5: Define exposures, adjusted exposures, commitments, covenants, and outstandings.

1、Bank X has contractually agreed to a $20,000,000 credit facility with Bank Y. Y will immediately access 40% of the commitment. Bank X has no experience with Bank Y and conservatively estimates drawdown in default to be 75%. Calculate the adjusted exposure for Bank X.

A) $12,000,000.

B) $8,000,000.

C) $15,000,000.

D) $17,000,000.

aianjie

 

The correct answer is D

Adjusted exposure  = OS + (COM ? OS) × UGD 

  = $8,000,000 + ($12,000,000) × (0.75) 

  = $17,000,000 

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2、Which statement best describes commitments and outstandings?

A) Outstandings includes loans but not bonds.

B) Outstandings represent the maximum possible credit exposure to the lender. 

C) Commitments represent credit available at the lenders’ request.

D) Borrowers can draw down on the commitment up to 100% at their discretion.

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AIM 3: Explain how credit downgrade or loan default affects the loan return.fficeffice" />

Which statement best describes the return to loans after ratings change?

A) Loan returns are asymmetric since the lender only partially absorbs the downside losses.

B) Loan returns are asymmetric as the lender absorbs all the downside losses and none of the upside.

C) Loan returns are symmetric as the lender absorbs all the downside losses and absorb the upside. 

D) Loan returns are symmetric as the lender enjoys upside benefits.

aianjie

 

The correct answer is B

Lenders absorb all losses in default but receive no upside if the borrower improves in credit quality.

      

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AIM 4: Distinguish between expected and unexpected loan loss.

1、Which of the following is TRUE concerning capital adequacy levels?

A) Expected loss is equally as important as unexpected loss in determining capital adequacy levels.

B) Unexpected loss is less important than expected loss in determining capital adequacy levels.

C) Expected loss is less important than unexpected loss in determining capital adequacy levels.

D) Expected loss is more important than unexpected loss in determining capital adequacy levels.

aianjie

 

The correct answer is C

Unexpected loss is more important in determining capital adequacy levels since the bank needs to stay solvent during the infrequent periods where actual losses deviate significantly from expected losses.

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2、Unexpected loss is defined as the risk of:

A) expected losses matching actual losses.

B) expected losses exceeding actual losses.

C) actual losses exceeding expected losses.

D) actual losses minimizing expected losses.

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The correct answer is C

Since 1 ? Recovery rate = Loss given default, Exposure × (1 ? Recovery rate) × Probability of default is correct.