BFM B - Unit 15 - Motivational Banker

1. Which of the following is not a type of credit risk?

Default risk

Credit spread risk

Intrinsic risk

Basis risk

Question 1 of 30

2. Risk of a portfolio with over exposure in steel sector will be

More than systematic risk

Equal to intrinsic risk

Less than intrinsic risk

None of these

Question 2 of 30

3. The risk that arises due to worsening of credit quality is

Intrinsic risk

Credit spread risk

Portfolio risk

Counterparty risk

Question 3 of 30

4. In order to develop our capability to actively manage our credit portfolio one must have in place the following: (a) Credit Rating Model (or models for different categories of loans and advances. (b) Develop and maintain necessary data on defaults of borrowers rating category-wise, i.e., Rating Migration'.

Both 1 and 2 are required

Only 1 is required

Only 2 is required

None of the above

Question 4 of 30

5. The model that combines five financial ratios using reported accounting information and equity values to produce an objective measure of borrower's financial health is

Altman's Z Score

'CreditMetrics

CreditRisk+

None of the above

Question 5 of 30

6. A transaction where financial securities are issued against the cash flow generated from a pool of assets is called

Securitization

Credit Default Swaps

Credit Linked Notes

Total Return Swaps

Question 6 of 30

7. As per RBI norms, in the case of residential mortgage-backed securities, the minimum retention requirement for the originator of securitization transaction should be______ of the book value of the loans being securitised, irrespective of the original maturity.

7.50%

10%

Question 7 of 30

8. Credit control and monitoring at the portfolio level primarily deals with:

Market risk assessment

Expected profits

Risk of a given portfolio and expected losses

Operational efficiency improvement

Question 8 of 30

9. What does "Credit Portfolio Value at Risk Models" aim to achieve?

Monitoring market liquidity

Evaluating concentration effects on the portfolio as a whole

Measuring obligor-specific risk associated with individual credit exposures

Estimating potential losses in the credit portfolio

Question 9 of 30

10. The credit risk of a bank's portfolio depends on both external and internal factors. Which of the following is NOT mentioned as an external factor?

State of the economy

Wide swings in commodity/equity prices

Deficiencies in loan policies/administration

Foreign exchange rates and interest rates

Question 10 of 30

11. What is Loan Review Mechanism (LRM) commonly referred to as?

Credit Grading

Credit Audit

Portfolio Assessment

Risk Evaluation

Question 11 of 30

12. What are the main objectives of Loan Review Mechanism (LRM)?

Assessing profitability of loans

Identifying loans with credit weaknesses and initiating corrective action

Evaluating marketing strategies for loan products

Ensuring compliance with government regulations

Question 12 of 30

13. What is one of the basic components of an effective Loan Review Mechanism (LRM)?

Loan disbursement process

Portfolio diversification

Accurate and timely credit grading

Customer service quality assessment

Question 13 of 30

14. What is the recommended frequency for reviewing high-value loans under Loan Review Mechanism (LRM)?

Annually

Every six months

Within three months of sanction or renewal

Every two years

Question 14 of 30

15. What aspect of loans does the depth of reviews in Loan Review Mechanism (LRM) focus on?

Loan disbursement procedures

Post-sanction follow-up

Customer service quality

Market trends

Question 15 of 30

16. How much of the portfolio should be subjected to Loan Review Mechanism (LRM) in a year, according to the text?

10-20%

50-60%

At least 30-40%

70-80%

Question 16 of 30

17. What is the approach for reviewing small-value retail loan accounts?

Comprehensive review of all accounts

Review on an exception basis

Review based on customer feedback

Review based on competitor analysis

Question 17 of 30

18. What is the primary purpose of securitization?

To convert long-term assets into short-term liabilities

To transfer credit risk from banks to investors

To increase the liquidity of assets

To reduce the need for capital reserves

Question 18 of 30

19. What are the tradable bonds issued in securitization transactions called?

Special Purpose Vehicles (SPVs)

Credit-linked notes

Pass-through Certificates (PTCs)

Credit enhancements

Question 19 of 30

20. What is a synthetic securitization?

A securitization structure where underlying assets are physical commodities

A securitization structure where credit risk is transferred using credit derivatives

A securitization structure where only government securities are included in the pool

A securitization structure where the originator retains full ownership of the assets

Question 20 of 30

21. What is the role of Loan Review Officers in the Loan Review Mechanism (LRM)?

To approve loan disbursement procedures

To assess customer service quality

To evaluate the effectiveness of loan administration and credit grading

To provide financial securities to investors

Question 21 of 30

22. What are collateralised loan obligations (CLOs)?

Securitised pools of mortgage loans

Securitised pools of commercial loans

Bonds issued by special purpose vehicles

Traded derivatives linked to credit risk

Question 22 of 30

23. What is the primary benefit for banks in structuring collateralised loan obligations (CLOs)?

Access to new lending opportunities

Immediate capital gains

Removal of assets from the balance sheet and potential capital release

Lowering interest rates on existing loans

Question 23 of 30

24. What distinguishes collateralised loan obligations (CLOs) from credit-linked notes?

CLOs are typically linked to a single credit, while credit-linked notes provide exposure to a diverse pool of credits.

CLOs provide a transfer of ownership of underlying assets, whereas credit-linked notes do not.

Credit ratings of CLOs are effectively capped to the issuer level, while credit-linked notes may have higher credit ratings.

CLOs do not involve the use of credit derivatives, unlike credit-linked notes.

Question 24 of 30

25. What is the purpose of credit derivative structures within CLO transactions?

To increase the credit rating of the originating institution

To decrease the credit rating of the special purpose vehicle (SPV) issuer

To transfer credit risk or market risk between the originator and the SPV issuer

To provide leverage to the SPV issuer

Question 25 of 30

26. What are collateralised bond obligations (CBOs)?

Securitised pools of mortgage loans

Securitised pools of commercial loans

Securitised pools of bonds

Traded derivatives linked to bond prices

Question 26 of 30

27. What are credit derivatives primarily used for in banking?

Increasing loan portfolio size

Speculative trading

Managing credit risk

Generating immediate capital gains

Question 27 of 30

28. What is the primary mechanism of a credit derivative transaction?

The Protection Buyer delivers the reference asset to the Protection Seller in exchange for regular premiums.

The Protection Seller agrees to pay regular premiums to the Protection Buyer.

The Protection Buyer transfers credit risks to the Protection Seller for a notional value, agreeing to pay regular premiums.

The Protection Seller transfers credit risks to the Protection Buyer, agreeing to pay regular premiums.

Question 28 of 30

29. Which organization has come out with a standardized format of documentation for credit derivatives transactions?

International Monetary Fund (IMF)

International Swaps and Derivatives Association, Inc. (ISDA)

World Bank

Securities and Exchange Commission (SEC)

Question 29 of 30

30. What are some forms of credit derivatives?

Interest Rate Swaps and Currency Swaps

Mortgage-backed Securities and Asset-backed Securities

Credit Default Swaps and Total Return Swaps

Futures and Options

Question 30 of 30

BFM B – Unit 15

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