1. Default by a large corporation is seldom a problem for FIs since these corporations have many different
sources of borrowed funds.
2. Junk bonds are bonds that are rated less than investment grade by bond-rating agencies.
3. During the decade of the 1990s the asset quality of U.S. banks continued to improve.
4. Sustained credit quality problems can drain an FI’s capital and net worth.
5. Credit risk applies only to bond investment and loan portfolios of FIs and banks.
6. The primary difficulty in arranging a syndicated loan is having all of the various lending and borrowing
parties reach agreement on terms, rates, and collateral.
7. A secured loan has a specific claim to the assets of the borrower in the case of default.
8. Unsecured debt is considered to be senior to secured debt.
9. The amount of security or collateral on a loan and the interest rate or risk premium on a loan normally are
negatively related.
10. A loan commitment is an agreement involving the amount of loan available and the amount of time during
which the loan can be initiated.
11. The exact interest rate to be charged on a fixed-rate loan is agreed upon by all parties at the time the
commitment is negotiated.
12. Long-term loans are more likely to be made under a loan commitment agreement than short-term loans.
13. Commercial paper has become an acceptable substitute source for bank loans for all corporations.
14. Commercial paper typically is secured by specific assets of the borrower.
15. Commercial loans have been decreasing in importance in bank loan portfolios.
16. Commercial real estate mortgages have been the fastest growing component of real estate loans.
17. Residential mortgages are the smallest component of bank real estate loan portfolios.
18. Since their introduction, the proportion of ARMs to fixed-rate residential mortgages has remained very
stable over interest rate cycles.
19. Because they are secured by homes, residential mortgages have demonstrated very little credit risk for FIs.
20. Adjustable rate mortgages have interest rates that adjust periodically according to the movement in some
index.
21. Usury ceilings are maximum rates imposed by federal legislation that FIs can charge on consumer and
mortgage debt.
22. Relationship pricing involves pricing for specific services which depend, in part, on the amount or number
of services that are used by the customer.
23. LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the domestic
money-center bank market.
24. Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending
institution, the actual interest rate on the usable portion of these loans is higher.
25. Adjusting interest rates, fees, and other terms upward for increasing amounts of default risk is a way to
attempt to realize the expected return on the loan.
26. At some point, further increases in interest rates on specific loans may decrease expected loan returns
because of increased probability of default by the borrower.
27. Credit rationing is a form of managing credit risk.
28. Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and
not by credit rationing.
29. There is a positive relationship between the interest rate charged on a retail loan and the expected return on
the loan.
30. Covenants are restrictions in loan and bond agreements that encourage or forbid certain actions by the
borrower.
31. A borrower’s reputation is an example of a market-specific factor in the credit decision.
32. The amount of leverage of a borrower and the probability of default are positively related, but only after
some minimum level of debt.
33. Recessionary phases in the business cycle typically cause greater hardship on companies that borrow large
amounts.
34. Willingness to post collateral may be a signal of more rather than less credit risk on the part of the
borrower.
35. Credit scoring models are advantageous because of their ability to sort borrowers into different default risk
classes.
36. A major advantage of discriminant models is the stability of the coefficient weights over time.
37. Discriminant models often ignore hard-to-quantify factors in the credit decision.
38. In terms of rating agencies such as S&P, investment grade companies are those whose bond ratings are
grade B or above.
39. The risk premium, or spread, between corporate bonds and Treasury securities tends to increase as the time
to maturity increases.
40. The probability that a borrower would default in any specific time period is a marginal default probability.
41. The cumulative default probability of a borrower in a given time period is one minus the product of the
marginal default probabilities for all time periods up to that time period.
42. The condition of no arbitrage profits implies that profits cannot be made without taking some risk.
43. The mortality rate is the past default experience of all asset quality, or risk, classes.
44. The marginal mortality rate is the probability of a bond or loan defaulting in any given year of the issue.
46. The payoff function of a loan to a debt holder is similar to writing a call option on the value of the
borrower’s assets with the face value of the debt as the exercise price.
47. RAROC is a measure of a firm’s cost of debt.
48. A major problem in estimating RAROC is the measurement of loan risk.
49. The traditional duration equation can be used to measure the capital at risk on the loan.
50. Which of the following is not a characteristic of a loan commitment?
51. Which of the following observations is true of a spot loan?
52. From the perspective of an FI, which of the following is an advantage of a floating-rate loan?
53. All other things equal, longer term loans are more likely to be
54. Which of the following observations concerning floating-rate loans is NOT true?
55. Which of the following is true of commercial paper?
56. Which of the following is NOT characteristic of the real estate portfolio for most banks?
57. Which of the following is NOT characteristic of the consumer loans at U.S. banks?
58. Revolving loans are credit lines
59. Which of the following factors may affect the promised return an FI receives on a loan?
60. Which of the following is not a qualitative factor in credit risk analysis?
61. Which of the following statements involving the promised return on a loan is NOT true?
62. Which of the following statements does NOT reflect credit decisions at the retail level?
63. Credit rationing by an FI
64. Which of the following statements does not reflect a borrower-specific factor often used in qualitative
default risk models?
65. In making credit decisions, the following item is considered a market-specific factor.
66. What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan
contract?
67. Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain
actions by the borrower?
68. Credit scoring models include all of the following broad types of models EXCEPT
69. In making credit decisions, the following item is considered a market-specific factor.
70. Borrower reputation is important in assessing credit quality because
71. Which of the following loan applicant characteristics is not relevant in the credit approval decision?