QUESTION: 13 Exam Topic: 1 Volume A

Which one of the following four options does NOT represent a benefit of compensating balances to the bank?

Compensating balances allow the bank to net some of the exposure they may have in case of default, by taking funds from these specific deposit account one the borrower defaults.
Since the compensating balances cannot be withdrawn at short notice, if at all, they are not considered transaction accounts and are able to provide a stable funding to the bank, reducing its reliance on more volatile external inter-bank based funding sources.
Compensation balances influence the expected loss rate of the bank given the default obligor and improve capital structure by controlling obligor type and avoiding payment delays.
Since the compensating balances reduce the next amount lent to the borrower, the earned return on the loan is increased, further widening the bank's interest rate margin and profitability.

Answer(s): C

QUESTION: 14 Exam Topic: 1 Volume A

According to a Moody's study, the most important drivers of the loss given default historically have been all of the following EXCEPT:

I) Debt type and seniority
II) Macroeconomic environment
III) Obligor asset type
IV) Recourse

I
II
I, II
III, IV

Answer(s): D

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QUESTION: 15 Exam Topic: 1 Volume A

A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year.
What is the expected duration for this three-year loan?