FINA 365 Chapter 10 True/False
Junk bonds are bonds that are rated less than investment grade by bond-rating agencies.
T
One of the problems with estimating expected default rates is that the analysis is based on historic data.
T
Recessionary phases in the business cycle typically cause greater hardship on companies that borrow large amounts.
T
During the decade of the 1990s the asset quality of U.S. banks continued to improve.
T
Unsecured debt is considered to be senior to secured debt.
F
Usury ceilings are maximum rates imposed by federal legislation that FIs can charge on consumer and mortgage debt.
F
A borrower's reputation is an example of a market-specific factor in the credit decision.
F
A major advantage of discriminant models is the stability of the coefficient weights over time.
F
Because of compensating balances and fees used to increase return on a loan, the credit risk premium is not the fundamental factor driving the promised return once the base rate on the loan has been set.
F
Because they are secured by homes, residential mortgages have demonstrated very little credit risk for FIs.
F
Commercial paper typically is secured by specific assets of the borrower.
F
Credit risk applies only to bond investment and loan portfolios of FIs and banks.
F
Default by a large corporation is seldom a problem for FIs since these corporations have many different sources of borrowed funds.
F
Generally, at the retail level, an FI controls credit risks solely by using a range of interest rates or prices and not by credit rationing.
F
In terms of rating agencies such as S&P, investment grade companies are those whose bond ratings are grade B or above.
F
LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the domestic money-center bank market.
F
Long-term loans are more likely to be made under a loan commitment agreement than short-term loans.
F
RAROC is a measure of a firm's cost of debt.
F
Residential mortgages are the smallest component of bank real estate loan portfolios.
F
Since their introduction, the proportion of ARMs to fixed-rate residential mortgages has remained very stable over interest rate cycles.
F
The mortality rate is the past default experience of all loans, regardless of quality.
F
The payoff function of a loan to a debt holder is similar to writing a call option on the value of the borrower's assets with the face value of the debt as the exercise price.
F
The primary difficulty in arranging a syndicated loan is having all of the various lending and borrowing parties reach agreement on terms, rates, and collateral.
F
There is a positive relationship between the interest rate charged on a retail loan and the expected return on the loan.
F
Credit scoring models are advantageous because of their ability to sort borrowers into different default risk classes.
T
A loan commitment is an agreement involving the amount of loan available and the amount of time during which the loan can be initiated.
T
A major problem in estimating RAROC is the measurement of loan risk.
T
A secured loan has a claim to specific assets of the borrower in the case of default.
T
Adjustable rate mortgages have interest rates that adjust periodically according to the movement in some index.
T
Adjusting interest rates, fees, and other terms upward for increasing amounts of default risk is a way to attempt to realize the expected return on the loan.
T
At some point, further increases in interest rates on specific loans may decrease expected loan returns because of increased probability of default by the borrower.
T
Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution, the actual return to the lender on the usable portion of these loans is higher.
T
Commercial loans have been decreasing in importance in bank loan portfolios.
T
Commercial paper has become an acceptable substitute source for bank loans formany large corporations.
T
Commercial real estate mortgages have been the fastest growing component of real estate loans.
T
Covenants are restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower.
T
Credit rationing is a form of managing credit risk.
T
Discriminant models often ignore hard-to-quantify factors in the credit decision.
T
Relationship pricing involves pricing for specific services which depend, in part, on the amount or number of services that are used by the customer.
T
Sustained credit quality problems can drain an FI's capital and net worth.
T
The amount of leverage of a borrower and the probability of default are positively related, but only after some minimum level of debt.
T
The amount of security or collateral on a loan and the interest rate or risk premium on a loan normally are negatively related.
T
The condition of no arbitrage profits implies that profits cannot be made without taking some risk.
T
The cumulative default probability of a borrower in a given time period is one minus the product of the marginal default probabilities for all time periods up to that time period.
T
The exact interest rate to be charged on a fixed-rate loan is agreed upon by all parties at the time the commitment is negotiated.
T
The marginal mortality rate is the probability of a bond or loan defaulting in any given year after it is issued.
T
The probability that a borrower would default in any specific time period is a marginal default probability.
T
The risk premium, or spread, between corporate bonds and Treasury securities tends to increase as the time to maturity increases.
T
The traditional duration equation can be used to measure the capital at risk on the loan.
T
Willingness to post collateral may be a signal of more rather than less credit risk on the part of the borrower
T
