# Financial Institutions Management 4th Edition By Saunders – Test Bank

Chapter 11 Testbank Key

- manage loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines

measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines__B.__

C. measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for normal declines

D. manage loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for normal declines

2.

The term ‘transition matrix’ refers to a matrix that provides a measurement of the probability of a loan:

A. being upgraded over some period

B. being downgraded over some period

C. defaulting over some period

** D.** All of the listed options are correct.

4.

Which of the following statements is true?

A. FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups’ performance are negatively correlated.

** B.** FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups’ performance are highly correlated.

C. FIs may set an aggregate limit of less than the sum of two individual industry limits if two industry groups’ performance are not correlated.

D. FIs may set an aggregate limit of more than the sum of two individual industry limits if two industry groups’ performance are negatively correlated.

6.

Which of the following statements is true?

- FIs typically increase their concentration limits to increase exposures to others.

FIs typically set concentration limits to reduce exposures to certain industries and increase exposures to others.__B.__

C. FIs typically set concentration limits to reduce their exposure to individual borrowers.

D. FIs typically decrease their concentration limits to decrease exposures to others.

7.

Which of the following statements is true?

A. The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one divided by the loss rate).

B. The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one multiplied by the loss rate).

** C.** The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one divided by the loss rate).

D. The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one multiplied by the loss rate).

8.

Assume that the maximum loss as a percentage of capital is 12% of an FI’s capital to a particular sector and that the amount lost per dollar of defaulted loans in this sector is 35%. What is the concentration limit (round to two decimals)?

** A.** 12% ´ (1/0.35) = 34.29%

B. 35% ´ (1/0.12) = 4.2%

C. 12% / (1 + 0.35) = 8.89%

D. 35% / (1 + 0.12) = 31.25%

9.

Assume that the maximum loss as a percentage of capital is 9% of an FI’s capital to a particular sector and that the amount recovered per dollar of defaulted loans in this sector is 70%. What is the concentration limit (round to two decimals)?

- 9% ´ (1/0.7) = 12.86%

9% ´ [1/(1-0.7)] = 30.00%__B.__

C. 70% / (1/0.09) = 6.30%

D. (100% – 70%) / (1/0.09) = 2.70%

10.

Assume that the maximum loss as a percentage of capital is 12% of an FI’s capital to a particular sector. The FI’s concentration limit on this sector 35%. What is the sector’s loss rate (round to two decimals)?

- 4.20%

B. 23.00%

34.29%__C.__

D. 2.92%

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