- What is credit risk?
- A) The risk of market fluctuations
- B) The risk of loss due to a borrower’s failure to repay a loan
- C) The risk of currency exchange rate changes
- D) The risk of operational failures
- Answer: B) The risk of loss due to a borrower’s failure to repay a loan
- Which of the following is a common measure of credit risk?
- A) Duration
- B) Credit score
- C) Interest rate
- D) Inflation rate
- Answer: B) Credit score
- What does a credit rating agency do?
- A) Sets interest rates
- B) Evaluates the creditworthiness of borrowers
- C) Manages investment portfolios
- D) Provides insurance against defaults
- Answer: B) Evaluates the creditworthiness of borrowers
- What is the primary purpose of a credit risk assessment?
- A) To maximize profit
- B) To determine the likelihood of borrower default
- C) To evaluate market trends
- D) To assess operational efficiency
- Answer: B) To determine the likelihood of borrower default
- Which of the following factors can influence a borrower’s credit risk?
- A) Payment history
- B) Economic conditions
- C) Debt-to-income ratio
- D) All of the above
- Answer: D) All of the above
- What is the role of collateral in credit risk?
- A) It guarantees loan repayment.
- B) It reduces the likelihood of default.
- C) It can be seized if the borrower defaults.
- D) All of the above
- Answer: D) All of the above
- Which of the following best describes default risk?
- A) The risk of losing collateral
- B) The risk that a borrower will be unable to make required payments
- C) The risk of changes in interest rates
- D) The risk of operational errors
- Answer: B) The risk that a borrower will be unable to make required payments
- What is a credit default swap (CDS)?
- A) A type of equity investment
- B) A financial derivative that transfers credit risk
- C) A method of evaluating creditworthiness
- D) An insurance policy against interest rate changes
- Answer: B) A financial derivative that transfers credit risk
- How can diversification help manage credit risk?
- A) By concentrating investments in one sector
- B) By spreading investments across different borrowers
- C) By avoiding low-rated borrowers
- D) By investing solely in government bonds
- Answer: B) By spreading investments across different borrowers
- Which regulatory framework aims to improve the management of credit risk in banks?
- A) IFRS
- B) Basel Accords
- C) GAAP
- D) Dodd-Frank Act
- Answer: B) Basel Accords
- What is the impact of poor credit risk management on a financial institution?
- A) Increased profitability
- B) Higher capital reserves
- C) Potential insolvency
- D) Lower operational costs
- Answer: C) Potential insolvency
- Which of the following is a method to assess credit risk?
- A) Credit scoring models
- B) Debt-to-equity ratio analysis
- C) Market trend analysis
- D) Asset valuation
- Answer: A) Credit scoring models
- What does the term “credit exposure” refer to?
- A) The total amount of money owed by a borrower
- B) The potential loss if a borrower defaults
- C) The risk associated with market fluctuations
- D) The duration of a loan
- Answer: B) The potential loss if a borrower defaults
- What is the primary risk associated with lending to subprime borrowers?
- A) Liquidity risk
- B) Credit risk
- C) Operational risk
- D) Interest rate risk
- Answer: B) Credit risk
- Which of the following can help mitigate credit risk in a loan portfolio?
- A) Increasing loan amounts
- B) Regularly reviewing borrowers’ credit profiles
- C) Offering loans without collateral
- D) Ignoring economic trends
- Answer: B) Regularly reviewing borrowers’ credit profiles
- What is the “probability of default” (PD) in credit risk assessment?
- A) The likelihood that a borrower will default on a loan
- B) The chance that a borrower will pay on time
- C) The probability of economic downturn
- D) The risk associated with interest rate changes
- Answer: A) The likelihood that a borrower will default on a loan
- What does “loss given default” (LGD) measure?
- A) The total exposure at default
- B) The percentage of loss a lender incurs when a borrower defaults
- C) The likelihood of a borrower defaulting
- D) The amount of collateral held
- Answer: B) The percentage of loss a lender incurs when a borrower defaults
- Which of the following is a credit risk indicator?
- A) High profit margins
- B) Low debt-to-income ratio
- C) Frequent late payments
- D) Strong industry performance
- Answer: C) Frequent late payments
- What is “credit risk modeling”?
- A) The process of creating financial models for investments
- B) The assessment of potential losses due to borrower defaults
- C) The evaluation of interest rate changes
- D) The analysis of operational efficiency
- Answer: B) The assessment of potential losses due to borrower defaults
- Which of the following can negatively affect a borrower’s creditworthiness?
- A) Consistent income
- B) High credit utilization
- C) Stable employment
- D) Low debt levels
- Answer: B) High credit utilization
- What role does the credit limit play in managing credit risk?
- A) It has no impact.
- B) It controls the maximum exposure to a borrower.
- C) It determines the interest rate charged.
- D) It influences the loan term.
- Answer: B) It controls the maximum exposure to a borrower.
- What is a “credit policy”?
- A) A guideline for approving loans and managing credit risk
- B) A strategy for investment in equities
- C) A plan for operational improvements
- D) A document outlining employee roles
- Answer: A) A guideline for approving loans and managing credit risk
- How can economic downturns affect credit risk?
- A) They generally reduce default rates.
- B) They can increase default rates due to higher unemployment.
- C) They have no impact on credit risk.
- D) They decrease the need for credit assessments.
- Answer: B) They can increase default rates due to higher unemployment.
- What does “credit risk transfer” involve?
- A) Shifting credit risk from one lender to another
- B) The sale of loans to third parties
- C) The use of insurance products to cover potential losses
- D) All of the above
- Answer: D) All of the above
- Which of the following can be a consequence of high credit risk?
- A) Lower interest rates
- B) Increased capital requirements
- C) Greater lending opportunities
- D) Reduced regulatory scrutiny
- Answer: B) Increased capital requirements
- What is the “credit spread”?
- A) The difference between two interest rates
- B) The difference in yield between a corporate bond and a risk-free bond
- C) The total amount of debt a borrower has
- D) The time it takes for a loan to be approved
- Answer: B) The difference in yield between a corporate bond and a risk-free bond
- What does a high debt-to-income ratio indicate?
- A) A borrower is financially stable
- B) A borrower may be at higher credit risk
- C) A low risk of default
- D) A strong credit profile
- Answer: B) A borrower may be at higher credit risk
- Which type of loan typically has the highest credit risk?
- A) Secured loans
- B) Unsecured personal loans
- C) Government-backed loans
- D) Mortgage loans
- Answer: B) Unsecured personal loans
- What is “counterparty risk”?
- A) The risk that a borrower will not repay a loan
- B) The risk that the other party in a financial transaction will default
- C) The risk associated with market fluctuations
- D) The risk of fraud in transactions
- Answer: B) The risk that the other party in a financial transaction will default
- Which of the following is a strategy for managing credit risk?
- A) Ignoring credit history
- B) Offering larger loans without assessment
- C) Conducting thorough due diligence before lending
- D) Reducing collateral requirements
- Answer: C) Conducting thorough due diligence before lending