What is credit risk?
A) The risk of a borrower defaulting on a loan
B) The risk of interest rate changes
C) The risk of foreign exchange fluctuations
D) The risk of inflation affecting loan values
Which of the following is a common method to manage credit risk?
A) Credit scoring
B) Interest rate swaps
C) Currency hedging
D) Inflation indexing
What does a high credit score indicate?
A) High risk of default
B) Low risk of default
C) High interest rates
D) Low income
Which type of credit risk occurs when a counterparty fails to fulfill their contractual obligations?
A) Operational risk
B) Market risk
C) Counterparty risk
D) Liquidity risk
What is the primary purpose of a credit rating agency?
A) To lend money to businesses
B) To assess and assign credit ratings to borrowers
C) To provide investment advice
D) To manage credit risk for banks
Which financial ratio is commonly used to assess a borrower’s creditworthiness?
A) Current ratio
B) Debt-to-equity ratio
C) Price-to-earnings ratio
D) Gross margin ratio
What does the term “credit spread” refer to?
A) The difference between the interest rate on a loan and the prime rate
B) The spread of credit risk across different industries
C) The difference between the yield on a corporate bond and a government bond
D) The range of credit scores in a population
Which document typically contains detailed information about a borrower’s financial history and creditworthiness?
A) Income statement
B) Credit report
C) Balance sheet
D) Cash flow statement
Which factor is not typically considered in a credit score calculation?
A) Payment history
B) Amounts owed
C) Length of credit history
D) Geographical location
What is the purpose of a loan covenant?
A) To reduce the interest rate on a loan
B) To impose restrictions on the borrower
What is credit risk? A) The risk of a borrower defaulting on a loan
B) The risk of interest rate changes
C) The risk of foreign exchange fluctuations
D) The risk of inflation affecting loan values
Answer: A) The risk of a borrower defaulting on a loan
Which of the following is a common method to manage credit risk? A) Credit scoring
B) Interest rate swaps
C) Currency hedging
D) Inflation indexing
Answer: A) Credit scoring
What does a high credit score indicate? A) High risk of default
B) Low risk of default
C) High interest rates
D) Low income
Answer: B) Low risk of default
Which type of credit risk occurs when a counterparty fails to fulfill their contractual obligations? A) Operational risk
B) Market risk
C) Counterparty risk
D) Liquidity risk
Answer: C) Counterparty risk
What is the primary purpose of a credit rating agency? A) To lend money to businesses
B) To assess and assign credit ratings to borrowers
C) To provide investment advice
D) To manage credit risk for banks
Answer: B) To assess and assign credit ratings to borrowers
Which financial ratio is commonly used to assess a borrower’s creditworthiness? A) Current ratio
B) Debt-to-equity ratio
C) Price-to-earnings ratio
D) Gross margin ratio
Answer: B) Debt-to-equity ratio
What does the term “credit spread” refer to? A) The difference between the interest rate on a loan and the prime rate
B) The spread of credit risk across different industries
C) The difference between the yield on a corporate bond and a government bond
D) The range of credit scores in a population
Answer: C) The difference between the yield on a corporate bond and a government bond
Which document typically contains detailed information about a borrower’s financial history and creditworthiness? A) Income statement
B) Credit report
C) Balance sheet
D) Cash flow statement
Answer: B) Credit report
Which factor is not typically considered in a credit score calculation? A) Payment history
B) Amounts owed
C) Length of credit history
D) Geographical location
Answer: D) Geographical location
What is the purpose of a loan covenant? A) To reduce the interest rate on a loan
B) To impose restrictions on the borrower to mitigate risk
C) To increase the loan amount available to the borrower
D) To provide insurance against default
Answer: B) To impose restrictions on the borrower to mitigate risk
Which of the following is a proactive measure to manage credit risk? A) Writing off bad debts
B) Diversifying the loan portfolio
C) Foreclosing on a property
D) Restructuring a loan
Answer: B) Diversifying the loan portfolio
What does the term “credit enhancement” mean? A) Increasing the interest rate on a loan
B) Improving the creditworthiness of a borrower
C) Providing additional security or guarantees for a loan
D) Extending the term of a loan
Answer: C) Providing additional security or guarantees for a loan
Which tool is commonly used to transfer credit risk to another party? A) Credit default swap
B) Forward contract
C) Interest rate swap
D) Currency option
Answer: A) Credit default swap
What is a key benefit of securitization in managing credit risk? A) Reducing the interest rate on loans
B) Increasing liquidity and transferring risk
C) Improving the credit rating of the issuer
D) Enhancing customer relationships
Answer: B) Increasing liquidity and transferring risk
Which strategy involves selling loans to another party to reduce credit risk? A) Loan syndication
B) Loan warehousing
C) Loan participation
D) Loan selling
Answer: D) Loan selling
What is the primary focus of the Basel III framework? A) Enhancing operational risk management
B) Strengthening bank capital requirements
C) Regulating foreign exchange markets
D) Managing interest rate risk
Answer: B) Strengthening bank capital requirements
Which of the following is a key component of credit risk regulation under Basel III? A) Market risk measurement
B) Liquidity coverage ratio
C) Net stable funding ratio
D) Counter