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FINA 465 EXAM 2 2026 ACTUAL
QUESTIONS WITH VERIFIED
ANSWERS.
What are the purposes of credit scoring models? How do these
models assist an FI manager to better administer credit? -
correct answer-redit scoring models are used to calculate the
probability of default or to sort borrowers into different default
risk classes. The primary benefit of credit scoring models is to
improve the accuracy of predicting borrower's performance
without using additional resources. This benefit results in fewer
defaults and charge-offs to the FI.
The models use data on observed economic and financial
borrower characteristics to assist an FI manager in (a)
identifying factors of importance in explaining default risk, (b)
evaluating the relative degree of importance of these factors,
(c) improving the pricing of default risk, (d) screening bad loan
applicants, and (e) more efficiently calculating the necessary
reserves to protect against future loan losses.
Altman's Z-Score - correct answer-Z = 1.2 X1 + 1.4 X2 + 3.3 X3
+ 0.6 X4 + 0.999 X5
3 < Z = company is safe
2.7 < Z < 2.99 = possible future problems
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1.8 < Z < 2.7 = chance of going bankrupt it 2 years
Z < 1.8 = Financial embarrassment is very high.
Consider the coefficients of Altman's Z score. Can you tell by
the size of the coefficients which ratio appears most important
in assessing the creditworthiness of a loan applicant? Explain. -
correct answer-Although X3, or EBIT/Total assets, has the
highest coefficient (3.3), it is not necessarily the most important
variable. Since the value of X3 is likely to be small, the product
of 3.3 and X3 may be quite small. For some firms, particularly
those in the retail business, the asset turnover ratio, X5 may be
quite large and the product of the X5 coefficient (1.0) and X5
may be substantially larger than the corresponding number for
X3. Generally, the factor that adds most to the Z-score varies
from firm to firm and industry to industry.
What is meant by the phrase marginal default probability? How
does this term differ from cumulative default probability? How
are the two terms related? - correct answer-Marginal default
probability is the probability of default in a given year, whereas
cumulative default probability is the probability of default across
several years. For example, the cumulative default probability
across two years is given below, where (pt) is the probability of
nondefault in a given year.
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What is the mortality rate of a bond or loan? What are some of
the problems with using a mortality rate approach to determine
the probability of default of a given bond issue? - correct
answer-Mortality rates reflect the historic default risk
experience of a bond or a loan. One major problem is that the
approach looks backward rather than forward in determining
probabilities of default. Further, the estimates are sensitive to
the time period of the analysis, the number of bond issues, and
the sizes of the issues
What is RAROC? How does this model use the concept of
duration to measure the risk exposure of a loan? How is the
expected change in the credit risk premium measured? What
precisely is DLN in the RAROC equation - correct answer-Risk
Adjusted Rate of Return on Capital
RAROC is a measure of expected loan net income in the form
of interest plus fees less cost of funding relative to some
measure of asset risk. One version of the RAROC model uses
the duration model to measure the change in the value of the
loan for given changes or shocks in credit quality. The change
in credit quality (DR) is measured by finding the change in the
spread in yields between Treasury bonds and corporate bonds
of the same risk class on the loan. The actual value chosen is
the highest change in yield spread for the same maturity or
duration value assets. In this case, DLN represents the change
in loan value or the change in capital for the largest reasonable
adverse changes in yield spreads. The actual equation for DLN
looks very similar to the duration equation.
FINA 465 EXAM 2 2026 ACTUAL
QUESTIONS WITH VERIFIED
ANSWERS.
What are the purposes of credit scoring models? How do these
models assist an FI manager to better administer credit? -
correct answer-redit scoring models are used to calculate the
probability of default or to sort borrowers into different default
risk classes. The primary benefit of credit scoring models is to
improve the accuracy of predicting borrower's performance
without using additional resources. This benefit results in fewer
defaults and charge-offs to the FI.
The models use data on observed economic and financial
borrower characteristics to assist an FI manager in (a)
identifying factors of importance in explaining default risk, (b)
evaluating the relative degree of importance of these factors,
(c) improving the pricing of default risk, (d) screening bad loan
applicants, and (e) more efficiently calculating the necessary
reserves to protect against future loan losses.
Altman's Z-Score - correct answer-Z = 1.2 X1 + 1.4 X2 + 3.3 X3
+ 0.6 X4 + 0.999 X5
3 < Z = company is safe
2.7 < Z < 2.99 = possible future problems
, Page | 2
1.8 < Z < 2.7 = chance of going bankrupt it 2 years
Z < 1.8 = Financial embarrassment is very high.
Consider the coefficients of Altman's Z score. Can you tell by
the size of the coefficients which ratio appears most important
in assessing the creditworthiness of a loan applicant? Explain. -
correct answer-Although X3, or EBIT/Total assets, has the
highest coefficient (3.3), it is not necessarily the most important
variable. Since the value of X3 is likely to be small, the product
of 3.3 and X3 may be quite small. For some firms, particularly
those in the retail business, the asset turnover ratio, X5 may be
quite large and the product of the X5 coefficient (1.0) and X5
may be substantially larger than the corresponding number for
X3. Generally, the factor that adds most to the Z-score varies
from firm to firm and industry to industry.
What is meant by the phrase marginal default probability? How
does this term differ from cumulative default probability? How
are the two terms related? - correct answer-Marginal default
probability is the probability of default in a given year, whereas
cumulative default probability is the probability of default across
several years. For example, the cumulative default probability
across two years is given below, where (pt) is the probability of
nondefault in a given year.
, Page | 3
What is the mortality rate of a bond or loan? What are some of
the problems with using a mortality rate approach to determine
the probability of default of a given bond issue? - correct
answer-Mortality rates reflect the historic default risk
experience of a bond or a loan. One major problem is that the
approach looks backward rather than forward in determining
probabilities of default. Further, the estimates are sensitive to
the time period of the analysis, the number of bond issues, and
the sizes of the issues
What is RAROC? How does this model use the concept of
duration to measure the risk exposure of a loan? How is the
expected change in the credit risk premium measured? What
precisely is DLN in the RAROC equation - correct answer-Risk
Adjusted Rate of Return on Capital
RAROC is a measure of expected loan net income in the form
of interest plus fees less cost of funding relative to some
measure of asset risk. One version of the RAROC model uses
the duration model to measure the change in the value of the
loan for given changes or shocks in credit quality. The change
in credit quality (DR) is measured by finding the change in the
spread in yields between Treasury bonds and corporate bonds
of the same risk class on the loan. The actual value chosen is
the highest change in yield spread for the same maturity or
duration value assets. In this case, DLN represents the change
in loan value or the change in capital for the largest reasonable
adverse changes in yield spreads. The actual equation for DLN
looks very similar to the duration equation.
