CCA Credit Risk Assessment 2

Question 1

Which formula correctly expresses expected loss (EL) on a credit exposure?

Accepted Answer

EL = PD × LGD × EAD

Answer

Expected loss is the product of probability of default, loss given default, and exposure at default.

Question 2

A loan has a PD of 2%, an LGD of 40%, and an EAD of $1,000,000. What is the expected loss?

Accepted Answer

$8,000

Answer

0.02 × 0.40 × $1,000,000 = $8,000.

Question 3

A commercial borrower reports a debt service coverage ratio (DSCR) of 0.90x. What does this indicate?

Accepted Answer

Operating cash flow is insufficient to fully cover scheduled debt service

Answer

A DSCR below 1.0x means available cash flow covers only 90% of required principal and interest.

Question 4

Which of the five Cs of credit focuses primarily on a borrower's integrity and history of honoring obligations?

Accepted Answer

Character

Answer

Character assesses willingness to repay, reflected in reputation and repayment track record.

Question 5

If the expected recovery rate on a defaulted secured loan is 65%, what is the loss given default?

Accepted Answer

35%

Answer

LGD equals one minus the recovery rate, so 1 − 0.65 = 35%.

CCA - Certified Credit Analyst Practice Test