WorksheetsLecture 7 - Credit risk I
Total questions: 15
Worksheet time: 8mins
A bank officer explains that credit risk arises even when market conditions are stable, because the main concern is whether the borrower can continue meeting the loan terms. Which statement best matches this idea?
The risk that exchange rate movements reduce loan portfolio value
The risk that borrowers fail to make promised interest or principal payments
The risk that rising interest rates lower the value of fixed-income assets
The risk that depositors suddenly withdraw funds from the banking system
A bank expands lending quickly but weakens its screening and monitoring standards. Which outcome is most likely if this problem continues?
Stronger net interest margins because higher-risk loans earn higher pricing
Easier access to emergency liquidity through central bank facilities
Greater asset quality problems that can weaken solvency and confidence
Faster customer growth that offsets the decline in loan performance
Silicon Valley Bank is often seen as an example of how several risks can interact. Which combination best explains why the case became so severe?
Credit losses and operating failures combined to weaken payment systems
Interest rate losses and deposit outflows combined to create acute stress
Sovereign exposure and equity market losses combined to erode earnings
Technology disruption and inflation pressure combined to reduce loan demand
A borrower is still making all scheduled payments, but investors now demand a much higher yield to hold that borrower’s bonds. What does this most likely show?
Default risk has already materialized through missed contractual payments
Reinvestment risk has risen because coupons will be reinvested at lower rates
Credit spread risk has increased because perceived credit quality has weakened
Liquidity risk has disappeared because the borrower still services the debt
Why can a credit downgrade increase the chance that a borrower eventually defaults, even if no payment has yet been missed?
It may raise borrowing costs and reduce the borrower’s financial flexibility
It may allow the borrower to refinance earlier at more attractive rates
It may increase the market value of equity and support internal funding
It may lower tax obligations and improve the borrower’s cash flow position
A lender is comparing two borrowers and is more concerned about one of them defaulting over the loan term. In which case is the lender most likely to demand collateral?
When the borrower has strong credit metrics and stable repayment capacity
When the facility is short-term, revolving, and frequently repriced
When the loan is small, unsecured, and intended for routine consumption
When the borrower appears riskier and the lender wants added protection
During uncertain economic conditions, which loan structure gives the lender the strongest direct control over credit exposure?
A secured term loan with defined amount and repayment schedule
An unsecured revolving facility with flexible drawdown and repayment
A peer-to-peer facility funded by many small outside investors
A floating-rate personal loan without collateral or usage restrictions
A mid-sized technology firm requests financing to support payroll, inventory, and short-term operating needs over the coming year. Which classification is most appropriate?
Consumer borrower using a revolving facility for household spending
Corporate borrower using a term loan for fixed long-term investment
Consumer borrower using a mortgage-backed facility for property purchase
Corporate borrower using a revolving credit line for working capital
Why can adjustable-rate mortgages increase credit risk for lenders when interest rates become more volatile?
They remove repricing pressure from the lender’s balance sheet entirely
They postpone principal repayment and weaken the lender’s cash inflow timing
They simplify underwriting because future installment amounts are flexible
They can strain borrowers after rate resets and raise default probability
What made adjustable-rate mortgages especially dangerous in the subprime mortgage crisis?
They were mainly affected by poor monetary policy rather than borrower quality
They relied on perfect credit scoring models that ignored market conditions
They reset to higher payments for weaker borrowers who were already vulnerable
They were linked directly to technology stock losses and funding pressures
A market analyst compares home financing structures across countries and asks about adjustable-rate mortgages in Malaysia. Which statement is false?
Many Malaysian housing loans are linked to a bank’s lending benchmark
The Overnight Policy Rate influences the broader floating-rate environment
Malaysian floating-rate mortgages are mainly tied to US Treasury benchmarks
Housing loan repricing tends to be less abrupt in a relatively stable system
A bank wants to estimate the likelihood that an individual borrower will default using past repayment patterns and personal financial information. Which tool is most appropriate?
Altman Z-score based on firm-level accounting variables and ratios
Credit scoring model based on borrower characteristics and default history
Internal audit review based on process compliance and control effectiveness
Basel III framework based on capital and liquidity regulatory standards
In which situation is the Altman Z-score likely to be most useful to a lender?
When assessing sovereign default risk on foreign government securities
When tracking repayment behavior on a portfolio of consumer credit cards
When evaluating bankruptcy risk in a corporate borrower with financial statements
When measuring short-term liquidity pressure in a household mortgage portfolio
Which factor would most likely be included in a borrower-specific qualitative credit assessment rather than a broad macroeconomic review?
The direction of national output growth over the next year
The borrower’s reputation, governance, and management capability
The path of policy rates set by the central bank over time
The trend of inflation across major global commodity markets
A lender uses a linear probability model in its internal credit analysis. What is the model mainly trying to estimate?
Whether a facility should be structured as secured or unsecured debt
Whether a borrower belongs to a higher or lower Z-score category
The probability that repayment or default occurs based on observable factors
The probability that a bond portfolio will outperform a market benchmark
