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Project Finance Quiz (Chapter 8)

Total questions: 60

Worksheet time: 30mins

Name
Class
Date
1.

According to the Basel Committee, a loan qualifies as “Specialized Lending” primarily because:

a)

It finances financial portfolios.

b)

It is granted to multinational corporations.

c)

Its repayment depends mainly on project cash flows.

d)

It involves multiple unrelated sponsors.

e)

It is secured by government guarantees.

2.

Under Basel rules, which characteristic does not define Specialized Lending?

a)

Use of SPV borrower.

b)

Dependence on project’s future cash flow.

c)

Loan used to finance tangible assets.

d)

Full recourse to sponsor balance sheet.

e)

Lender control over project assets.

3.

Which of the following would most likely be classified as corporate exposure rather than project finance under Basel II?

a)

A toll road financed by an SPV with traffic risk.

b)

A wind farm selling power under a 25-year take-or-pay PPA with a AAA offtaker.

c)

A shipping project with revenues depending on charter rates.

d)

A greenfield LNG plant with construction risk.

e)

A new stadium with volatile ticket demand.

4.

Which is not one of the five Specialized Lending subcategories under Basel?

a)

Project Finance

b)

Object Finance

c)

Commodity Finance

d)

Infrastructure Leasing

e)

High-Volatility Commercial Real Estate

5.

Which Basel framework introduced the concept of slotting criteria for project finance?

a)

Basel I

b)

Basel II

c)

Basel 2.5

d)

Basel III

e)

Basel IV

6.

The Basel Committee’s main reason for creating a separate SL category was:

a)

To encourage banks to fund infrastructure projects.

b)

Because project-finance risk differs from traditional corporate risk.

c)

To reduce capital requirements on long-term loans.

d)

To simplify accounting for SPVs.

e)

To regulate construction contractors.

7.

Under Basel’s Specialized Lending framework, the borrower’s legal form is typically:

a)

A joint-stock company with multiple divisions.

b)

An SPV created solely for the project.

c)

A bank subsidiary.

d)

A private equity fund.

e)

A sovereign borrower.

8.

Basel’s treatment of Specialized Lending exposures primarily impacts:

a)

Sponsor’s equity cost.

b)

Bank’s liquidity coverage ratio.

c)

Bank’s regulatory capital requirement.

d)

Government fiscal deficit.

e)

EPC contractor’s profit margin.

9.

Which Basel III reform most directly affects long-term project finance lending capacity?

a)

Leverage ratio limit

b)

Liquidity Coverage Ratio (LCR)

c)

Countercyclical buffer

d)

Net Stable Funding Ratio (NSFR)

e)

Market risk capital charge

10.

Under Basel’s definitions, “self-liquidating” exposure refers to:

a)

Debt repaid through asset sale proceeds.

b)

Debt automatically written off.

c)

Equity funded through dividends.

d)

Projects refinanced by government bonds.

e)

Sponsor guarantees fully covering repayment.

11.

Basel’s slotting approach classifies project finance loans into how many categories (excluding default)?

a)

Two

b)

Three

c)

Four

d)

Five

e)

Six

12.

Which of the following is not one of the five qualitative assessment factors in Basel’s rating system?

a)

Financial strength

b)

Sponsor strength

c)

Transaction characteristics

d)

Political and legal environment

e)

Market capitalization of the sponsor

13.

A project with solid DSCR, strong contracts, and reputable sponsors would most likely fall into which slotting category?

a)

Strong

b)

Good

c)

Satisfactory

d)

Weak

e)

Default

14.

Under Basel, a “Weak” project is likely characterized by:

a)

Strong financial ratios and enforceable contracts.

b)

Unproven technology and limited sponsor support.

c)

Proven operational record.

d)

Long-term offtake agreements with AAA buyers.

15.

The financial strength criterion evaluates primarily:

a)

Project governance

b)

DSCR, leverage, and reserve accounts

c)

Sponsor reputation

d)

EPC contractor’s shareholding

e)

Insurance coverage

16.

The political and legal environment factor assesses:

a)

Shareholder voting rights

b)

Country’s regulatory and contract enforcement stability

c)

Bank’s internal credit policy

d)

EPC contractor quality

e)

Technical design risk

17.

The transaction characteristics factor deals mainly with:

a)

The sponsor’s country risk

b)

The project’s technical, construction, and market risk structure

c)

Tax benefits of SPV

d)

Financial guarantees issued by banks

e)

Accounting treatments

18.

Sponsor strength provides:

a)

Moral support only

b)

No impact on risk rating

c)

Implicit credit enhancement

d)

Guaranteed repayment by parent company

e)

Currency hedging

19.

Mitigants such as step-in rights and escrow accounts primarily reduce:

a)

Probability of Default (PD)

b)

Loss Given Default (LGD)

c)

Exposure at Default (EAD)

d)

Construction risk

e)

Sovereign risk

20.

The slotting approach assigns lower risk weights to:

a)

Projects with limited recourse

b)

Projects with strong structure and proven performance

c)

Greenfield projects under construction

d)

Highly leveraged speculative projects

e)

Projects with weak sponsors

21.

Under Basel II, a “Strong” project finance exposure typically carries a risk weight of:

a)

50%

b)

70%

c)

90%

22.

In the Foundation IRB approach, banks estimate:

a)

LGD only

b)

PD only

c)

Both PD and LGD

d)

Only EAD

e)

None — all fixed by regulator

23.

Under Advanced IRB, banks may estimate:

a)

PD, LGD, and EAD

b)

PD only

c)

LGD only

d)

EAD only

e)

Only risk weights

24.

Higher risk weights in Basel’s slotting approach imply:

a)

Lower regulatory capital requirement

b)

Higher capital and higher loan pricing

c)

Lower interest margins

d)

Reduced construction risk

e)

Guaranteed government support

25.

Basel initially viewed project finance as:

a)

Equal in risk to corporate loans

b)

More risky than corporate loans

c)

Less risky than sovereign loans

d)

Noncredit exposure

e)

Fully risk-free

26.

Banks criticized Basel’s early view because:

a)

It ignored sovereign risk.

b)

It underestimated construction delays.

c)

It lacked empirical justification for higher PF risk weights.

d)

It favored small banks.

e)

It duplicated accounting rules.

27.

A direct consequence of overestimating PF risk in regulation would be:

a)

Cheaper financing

b)

Reduced bank appetite for PF loans

c)

Increased public-private partnerships

d)

Lower DSCR thresholds

e)

Reduced equity requirements

28.

Basel’s capital charge for PF is based on:

a)

Project size

b)

Borrower nationality

c)

Risk weight × exposure × 8%

29.

Which Basel III reform indirectly increases the cost of PF lending?

a)

Countercyclical buffer

b)

Higher common equity ratio

c)

Market risk revisions

d)

NSFR requirements

e)

All of the above

30.

Basel’s conservative stance on PF credit risk was later proven:

a)

Overly optimistic

b)

Statistically unjustified and too conservative

c)

Accurate

d)

Favorable to borrowers

e)

Limited to real estate projects

31.

IFC’s study (1956–2001) found PF loss rate:

a)

5.5%

b)

4.1%

c)

3.1%

d)

2.1%

e)

1.1%

32.

The IFC concluded that PF risk profile corresponded to corporate ratings of:

a)

CCC

b)

BB+ to BBB–

c)

A to AA

d)

B– to BB

e)

AAA

33.

The 4-bank consortium study estimated average LGD around:

a)

10%

b)

25%

c)

45%

d)

60%

e)

75%

34.

According to Moody’s 2010 data, project-finance 10-year PD was approximately:

a)

5%

b)

8%

c)

11.5%

d)

20%

e)

25%

35.

Recovery rates for projects in operation phase average around:

a)

60%

b)

67%

36.

Construction-phase defaults generally have recovery rates around:

a)

50%

b)

60%

c)

67%

d)

75%

e)

85%

37.

Empirical studies showed project-finance loans perform:

a)

Worse than corporates

b)

About the same

c)

Better than corporates (lower PD, higher recovery)

d)

Volatile and unpredictable

e)

Only in public sector

38.

A key reason for PF’s strong recovery rates is:

a)

Lenders’ recourse to sponsor’s assets

b)

Liquid secondary market for projects

c)

High collateralization and contractual rights

d)

Government bailouts

e)

Political intervention

39.

Which empirical source most influenced the Basel revision debate?

a)

Moody’s PF report

b)

IFC portfolio data

c)

World Bank infrastructure survey

d)

Fitch sovereign default study

e)

IMF liquidity research

40.

From empirical findings, the most critical phase for default risk is:

a)

Pre-construction

b)

Construction

c)

Operation

d)

Refinancing

e)

Decommissioning

41.

Expected Loss (EL) is calculated as:

a)

EL = EAD / LGD

b)

EL = PD + LGD + EAD

c)

EL = PD × LGD × EAD

d)

EL = EAD × (1–LGD)

e)

EL = PD × Recovery Rate

42.

Unexpected Loss (UL) represents:

a)

Average expected credit loss

b)

Volatility or uncertainty around expected loss

43.

In Basel’s capital adequacy, capital mainly covers:

a)

Expected Loss

b)

Unexpected Loss

c)

Total assets

d)

LGD

e)

Operational risk

44.

EL is typically covered by:

a)

Insurance

b)

Loan pricing and provisions

c)

Tax subsidies

d)

Equity infusion

e)

Bond guarantees

45.

Value at Risk (VaR) quantifies:

a)

Average annual loss

b)

Worst-case loss over time at chosen confidence level

c)

Total loan exposure

d)

Sponsor’s equity risk

e)

Minimum recovery rate

46.

Monte Carlo simulation in PF risk analysis is used to:

a)

Randomly allocate debt

b)

Forecast thousands of cash-flow scenarios

c)

Determine tax rates

d)

Calculate bond yields

e)

Estimate IRR only

47.

Which variable is not typically stochastic in PF Monte Carlo models?

a)

Revenue volume

b)

Construction delay

c)

DSCR

d)

Contract enforceability

e)

Input costs

48.

A project with PD = 5%, LGD = 30%, EAD = $100m has EL =

a)

$1.5m

b)

$5m

c)

$15m

d)

$30m

e)

$50m

49.

LGD of 25% implies recovery rate of:

a)

25%

b)

50%

50.

Unexpected Loss depends heavily on:

a)

PD variance and asset correlation

b)

Inflation rates

c)

Sponsor shareholding

d)

Government subsidies

e)

Debt maturity

51.

Higher DSCR mainly reduces:

a)

PD

b)

LGD

c)

EAD

d)

Sovereign risk

e)

Political risk

52.

Step-in rights help lenders by:

a)

Enhancing project revenue

b)

Allowing operational control after default

c)

Lowering construction cost

d)

Reducing government approval time

e)

Increasing sponsor returns

53.

Political-risk insurance affects:

a)

PD only

b)

LGD only

c)

Both PD and LGD

d)

Neither

e)

Only sponsor equity

54.

Projects with fixed-price, date-certain EPC contracts benefit mainly by reducing:

a)

Operational risk

b)

Construction risk

c)

Market risk

d)

Financial risk

e)

Sovereign risk

55.

Higher leverage in PF structures typically:

a)

Lowers sponsor IRR

b)

Increases lender’s credit risk

c)

Reduces risk weight

d)

Improves DSCR

e)

Strengthens balance sheet

56.

A long-term offtake contract with a creditworthy buyer primarily mitigates:

a)

Operational risk

b)

Construction risk

57.

Which risk is most mitigated by long-term contracts in PF?

a)

Construction risk

b)

Refinancing risk

c)

Market or demand risk

d)

Sovereign risk

e)

Legal risk

58.

Basel’s overestimation of PF risk primarily resulted from:

a)

Lack of default data in early studies

b)

Miscalculation of currency exposures

c)

Ignoring equity IRRs

d)

Political bias

e)

Pressure from rating agencies

59.

A project with high LGD but low PD is most likely:

a)

Stable but poorly secured

b)

Volatile and well insured

c)

Overleveraged and speculative

d)

Early-stage without sponsors

e)

Guaranteed by sovereign

60.

The phase where correlation among defaults is highest across PF portfolios is:

a)

Construction phase

b)

Operation phase

c)

Refinancing phase

d)

Maturity phase

e)

Decommissioning

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