BMO Financial Analysis & Risk Evaluation 3

Question 1

A bank calculates that a loan portfolio has a 2% probability of default (PD) and a 45% loss given default (LGD) on a $10M exposure. What is the expected loss?

Accepted Answer

$90,000

Answer

Expected Loss = PD × LGD × EAD = 0.02 × 0.45 × $10,000,000 = $90,000.

Question 2

Which financial statement best reveals a company's ability to generate cash from its core business operations?

Accepted Answer

Statement of cash flows — operating section

Answer

The operating section of the cash flow statement shows cash generated from core business activities, excluding financing and investing activities.

Question 3

What does a negative working capital position generally indicate for a retail company like a grocery chain?

Accepted Answer

Efficient operations where suppliers fund inventory

Answer

Retail companies often run negative working capital because they collect cash quickly from customers while paying suppliers on extended credit terms.

Question 4

In portfolio risk management, what does 'Value at Risk' (VaR) measure?

Accepted Answer

The maximum loss not exceeded at a given confidence level over a specific period

Answer

VaR estimates the maximum loss a portfolio would not exceed at a specified confidence level (e.g., 95%) over a defined time horizon.

Question 5

A company's interest coverage ratio drops from 8.0x to 2.5x. How should a credit analyst interpret this change?

Accepted Answer

The company's ability to service debt has materially weakened

Answer

An interest coverage ratio falling from 8.0x to 2.5x signals significantly reduced earnings relative to interest obligations, increasing default risk.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Financial Analysis & Risk Evaluation 3