Credit Risk Management Credit Risk Management MCQ 5

Question 1

Altman's Z-score model is primarily used to:

Accepted Answer

Predict corporate bankruptcy probability using financial ratios

Answer

Altman's Z-score combines five financial ratios to produce a score that predicts whether a firm is likely to go bankrupt.

Question 2

In the context of credit risk, 'exposure at default' (EAD) for an undrawn revolving credit facility is most significantly affected by:

Accepted Answer

The credit conversion factor (CCF) applied to the undrawn commitment

Answer

The CCF estimates how much of the undrawn commitment a borrower is likely to draw before defaulting, directly determining EAD.

Question 3

A bank's internal credit model is found to be systematically underestimating PDs during economic expansions. This is a classic symptom of:

Accepted Answer

Procyclicality in point-in-time rating models

Answer

Point-in-time models underestimate risk in good times and overestimate it in downturns, creating procyclical capital requirements.

Question 4

Which of the following is the correct regulatory definition of 'default' under the Basel framework?

Accepted Answer

A borrower is 90 days past due or the bank considers full repayment unlikely

Answer

Basel defines default as 90 days past due on a material credit obligation, OR when the bank judges full repayment unlikely without recourse to collateral.

Question 5

A credit analyst is reviewing a leveraged buyout (LBO) target. Which metric is most critical for assessing the target's ability to service its post-acquisition debt load?

Accepted Answer

EBITDA-to-debt service coverage

Answer

EBITDA-to-debt service coverage directly measures whether the target's operating cash flow can cover LBO-related interest and principal payments.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Credit Risk Management MCQ 5