#1
What is the primary goal of credit risk assessment?
Minimizing losses
ExplanationThe aim is to reduce potential financial losses associated with lending.
#2
What is a common qualitative factor considered in credit risk assessment?
Business reputation
ExplanationIt reflects the perceived reliability and trustworthiness of a borrower's business.
#3
Which credit risk assessment method relies on the historical performance of loans to predict future defaults?
Behavioral scoring
ExplanationIt analyzes past behavior patterns to forecast potential future default events.
#4
Which of the following is a quantitative method used in loan evaluation?
Credit scoring
ExplanationIt involves numerical assessment of a borrower's creditworthiness based on various factors.
#5
What does the Debt-to-Income (DTI) ratio measure in credit risk assessment?
Borrower's income compared to debts
ExplanationIt evaluates the proportion of a borrower's income allocated to debt repayments.
#6
What does the Credit Default Swap (CDS) market assess in credit risk?
Probability of default on loans
ExplanationIt involves trading financial instruments to hedge against the risk of default on loans.
#7
Which financial statement is commonly analyzed during credit risk assessment?
Balance sheet
ExplanationIt provides insights into a borrower's financial position, including assets, liabilities, and equity.
#8
Which regulatory body is often involved in overseeing credit risk management in financial institutions?
Federal Reserve (Fed)
ExplanationIt plays a significant role in regulating and supervising financial institutions to ensure stability and soundness in the financial system.
#9
What is the significance of the Loan-to-Value (LTV) ratio in mortgage lending?
Evaluating the property's value compared to the loan amount
ExplanationIt measures the risk associated with a mortgage by comparing the loan amount to the appraised value of the property.
#10
What is the purpose of stress testing in credit risk management?
Evaluating the impact of adverse events on loan portfolios
ExplanationTo assess how loan portfolios would perform under unfavorable economic conditions.
#11
In credit risk assessment, what does the term 'collateral' refer to?
Assets pledged as security for a loan
ExplanationIt provides a lender with security in case of borrower default by offering valuable assets as collateral.
#12
What is the role of a credit rating agency in credit risk evaluation?
Assessing the creditworthiness of borrowers
ExplanationThey assign credit ratings to borrowers indicating their ability to repay debts.
#13
Which risk mitigation strategy involves transferring credit risk to a third party?
Risk transfer
ExplanationIt involves shifting the risk of borrower default to another party through mechanisms like insurance or derivatives.
#14
Which credit risk metric assesses the concentration of risk within a loan portfolio?
Portfolio concentration ratio
ExplanationIt indicates the level of risk exposure due to the distribution of assets within a loan portfolio.
#15
What is the concept of 'covenant' in credit risk management?
A promise or agreement made by the borrower to the lender
ExplanationIt outlines specific terms and conditions that a borrower must adhere to, typically to protect the lender's interests.