Credit Risk Management Credit Risk Modeling 2

Question 1

Loss Given Default (LGD) is defined as what percentage?

Accepted Answer

The portion of exposure lost when a default occurs

Answer

LGD represents the proportion of exposure that is not recovered after a default event, expressed as a percentage of EAD.

Question 2

What does EAD stand for in credit risk?

Accepted Answer

Exposure at Default

Answer

Exposure at Default (EAD) is the estimated loan balance outstanding at the time a borrower defaults.

Question 3

Expected Loss (EL) is correctly calculated as which of the following?

Accepted Answer

PD × LGD × EAD

Answer

Expected Loss equals the product of Probability of Default, Loss Given Default, and Exposure at Default.

Question 4

Which statistical technique is commonly used to build retail credit scorecards?

Accepted Answer

Logistic regression

Answer

Logistic regression is the industry-standard technique for retail credit scorecards due to its interpretability and probabilistic output.

Question 5

In credit risk modeling, what is 'vintage analysis' used for?

Accepted Answer

Tracking default performance of loan cohorts originated at the same time

Answer

Vintage analysis groups loans by their origination period and tracks performance over time to identify underwriting quality trends.

Credit Risk Management Practice Test