THE CONTEXT OF CREDIT RISK ANALYSIS - ASSESSMENT QUESTIONS

THE CONTEXT OF CREDIT RISK ANALYSIS – ASSESSMENT QUESTIONS

Instructions

1. Read the instructions carefully before attempting the questions

2. Answer all questions

3. All questions carry equal marks

4. All questions are multiple-choice questions designed to assess your ability to think critically about the subject. Please read each question carefully before reading the answer options. Be aware that some questions may seem to have more than one right answer, but you are to look for the one that makes the most sense and is the most correct. When you have a clear idea of the question, find your answer and tick the correct option

5. Time Allowed - 30min

6. Pass mark is 70%

NameEmailPhone Number

1 / 10

1. Financial institutions and investors make money:

By putting to use the institutions equity

By spending their customer deposits

By putting capital at risk

By de-risking customer deposits and investor funds

2 / 10

2. The owners of borrowed funds or deposits that a lender works with are compensated by?

Earned interest rate and the cost of funds

Cost of funds

Spread

FIs internal cost structure

3 / 10

3. Which of the following is a strong environmental reason for improving credit processes?

Loan Pricing and structuring

Capital position

Limited funds

Survival prospects of a Financial Institution

4 / 10

4. Why is it critical for a loan officer to understand the relationship between credit risk of a customer and the interest rate charged on the loan.

Investment grade companies are considered high risk

Non-investment grade businesses are in a position bargain for lower interest rates

Lending to companies with respectable credit ratings yield a low return on lending.

I don’t know

5 / 10

5. A business may be classified as speculative risk because;

Lenders specialize in solving informational problems.

There is not enough information available about the future prospects of the business.

The business operates in a non-cyclical environment

There is enough information known about how markets would react to its products.

6 / 10

6. Why are banks and Lending Financial Institutions highly leveraged organizations?

They classify and price risk correctly

When a risk is classified and priced inaccurately, the banks and Lending Financial Institutions are at risk for losing capital as well as borrowed funds.

Banks and Lending Financial Institutions finance between 75% - 90% of their assets from deposits and other liabilities.

Banks and Lending Financial institutions total liabilities are also their greatest risk

7 / 10

7. Why is it important for FIs to improve the effectiveness and accuracy of the information gathering function?

Customers must provide information required by the FI.

Everything else is dependent on the quality of the output generated at the information gathering step

Effective loan officers assume that information provided by customers is accurate and reliable.

FIs can only make accurate decisions if they collect information from customers

8 / 10

8. Which of the following does NOT describe an effective credit process?

Failure to make interest or principal payment or violation of loan covenants.

Reduces the potential for loss resulting from an actual or perceived deterioration in the financial health of the business.

Receives adequate compensation for bearing default risk.

I don’t know

9 / 10

9. Who sets the objectives and guidelines of credit risk in a lending organization

The Management committee

The Board of Directors

The Head office Credit Committee

The CEO and the Credit team

10 / 10

10. Why is documentation the most important part of the lending process.

You can only win litigations when you have documents

It is in documentation that a lender establishes a claim on the customer’s assets in case of default.

When you have documentation, you do not need to inform internal, external, industry or regulatory.

Your score is

The average score is 43%

0%

THE CONTEXT OF CREDIT RISK ANALYSIS – ASSESSMENT QUESTIONS

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