Banking Exam Credit Risk and Analysis 4

Question 1

Which of the following is a primary purpose of credit stress testing?

Accepted Answer

To assess portfolio resilience under adverse economic scenarios

Answer

Stress testing evaluates how a credit portfolio would perform under severe but plausible adverse conditions, informing capital planning and risk limits.

Question 2

A borrower has a high debt-to-income (DTI) ratio. What does this signal to a lender?

Accepted Answer

The borrower may struggle to manage additional debt obligations

Answer

A high DTI means a large portion of income is already committed to debt payments, leaving less cushion for new obligations.

Question 3

In a leveraged buyout (LBO) scenario, what is the primary credit concern for senior lenders?

Accepted Answer

High debt load reducing cash flow available for debt service

Answer

LBOs are highly leveraged transactions where thin cash flow margins leave little buffer for debt service if business performance declines.

Question 4

What is 'credit migration risk'?

Accepted Answer

The risk that a borrower's credit rating deteriorates over time, increasing default probability

Answer

Credit migration risk is the probability that a borrower's rating will deteriorate, affecting the value of the exposure even before default.

Question 5

A bank originates a loan with a personal guarantee from the business owner. What credit risk benefit does this provide?

Accepted Answer

It provides an additional repayment source if the business defaults

Answer

A personal guarantee gives the lender recourse against the guarantor's personal assets, creating a secondary repayment source beyond business cash flows.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Credit Risk and Analysis 4