Pre Exam CICC Day 5

What is the likely reason for some banks to be active in emerging markets while some banks only want to do business in developed markets?

• It is more profitable to do business in developed markets.

• Banks are accorded a higher credit rating if they deal only with developed markets.

• Banks want to be seen as first-class institutions serving the developed markets.

• Banks have different risk appetites and hence may target different markets.

What two measurements can help a bank set its origination targets?

• Economic profitability and capital adequacy ratio.

• Capital adequacy ratio and RAROC.

• Economic profitability and accounting profitability.

• Economic profitability and RAROC.

What is the purpose of risk-adjusted return on capital?

• To identify investments that generate the highest revenue.

• To provide a level comparison between deals with different risk characteristics.

• To determine the opportunity cost of deploying capital in different investments.

• To identify investments that consume the lowest amount of capital.

Given the information below, what is the income margin on the loan?

Interest rate : 6%

Cost of funds : 4%

Amount of loan : $500,000

• $10,000

• $20,000

• $30,000

• $40,000

How can a lender prepare itself for extreme economic events?

• By putting in place testing procedures to analyse the impact of catastrophic natural events on the lender's overall credit portfolio.

• By using stress-testing procedures to analyse the potential impact of events that can be hedged, on the lender's overall credit portfolio.

• By establishing stress-testing procedures to analyse the impact of such events on the credit risk of the lender's overall credit portfolio.

• By using random testing procedures when and if management has reason to believe that a major security event is about to take place.

What is the likely reason for some banks to be active in emerging markets while some banks only want to do business in developed markets?

• Banks have different risk appetites and hence may target different markets.

• Banks want to be seen as first-class institutions serving the developed markets.

• Banks are accorded a higher credit rating if they deal only with developed markets.

• It is more profitable to do business in developed markets.

How does Credit Portfolio Management adjust its risk-adjusted return indicators?

• By replacing credits that have a good risk-return profile with credits that have a better ratio.

• By replacing credits that have an acceptable risk-return profile with credits that have a better ratio.

• By replacing credits that have a poor risk-return profile with credits that have a better ratio.

• By replacing credits that have an unacceptable risk-return profile with credits that have a lower ratio.

Why do riskier loans not always generate more revenue?

• A bank may choose not to price a risky loan as high as it should in order to win key deals to secure a relationship with a high-potential client or to win a key client relationship.

• A bank may choose not to price a risky loan as high as it should in order to meet regulations or to keep good working relations with the regulators.

• You can never be sure of the return you can expect to have on a loan.

• The riskier the loan, the lower the return.

Which statement on economic profit measurement is correct?

• The less risky the deal, the greater the expected loss and the more capital it will attract.

• The riskier the deal, the greater the expected loss and the more capital it will attract.

• The less risky the deal, the greater the expected loss and the less capital it will attract.

• The riskier the deal, the lower the expected loss and the less capital it will attract.

Given the information below, what is the income margin on the loan?

Interest rate : 5.5%

Cost of funds : 3.9%

Amount of loan : $750,000

• $12,000

• $18,000

• $24,000

• $6,000