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Quiz about Risky Businesses
Quiz about Risky Businesses

Risky Businesses Trivia Quiz


So you think you would like to be on the other side of the loan appraisal process? Take a look at the different types of risk that banks have to look at while dealing with loan applications.

A multiple-choice quiz by zorba_scank. Estimated time: 5 mins.
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Author
zorba_scank
Time
5 mins
Type
Multiple Choice
Quiz #
326,290
Updated
Jul 23 22
# Qns
10
Difficulty
Average
Avg Score
7 / 10
Plays
430
- -
Question 1 of 10
1. The Central banks of the G10 countries (which includes UK and USA among others) formed a committee in 1974 which issues guidelines regarding the conduct of banks. Which European city is the committee named after? Hint


Question 2 of 10
2. Which of the following terms signifies a basic type of risk that is invoked whenever any lending is involved? Hint


Question 3 of 10
3. Credit rating agencies rate customers based on a number of parameters including their financial strength and their performance relative to industry peers. What is the term used to denote bonds that are below investment grade? Hint


Question 4 of 10
4. The first loan application you have to deal with concerns a project loan for the construction of a bridge by an infrastructure company. Which of the following is NOT likely to be a factor in your assessment of this project? Hint


Question 5 of 10
5. The next loan application seems like a piece of cake. A well known automobile company with an AAA credit rating and impeccable financials has requested a term loan for a period of five years. Everything seems to be in order and you're just about to approve the loan when you suddenly realize that approving it may increase your concentration risk. Which of the following factors is NOT likely to be a cause for your concern? Hint


Question 6 of 10
6. If the loan amount is too high, two or more financiers may decide to get together to service it. In such an arrangement, if you are told that your charge on the security offered by the borrower is pari passu to that of the other lenders, what does it mean? Hint


Question 7 of 10
7. Apart from the regular risks to be assessed in every business loan proposal, which of the following is an additional risk to be considered when funding a company that has its major suppliers or buyers based outside the country? Hint


Question 8 of 10
8. As a banker you may also choose to invest in the bonds issued by another country. Sovereign risk is a type of risk specific to this kind of investment. Which of the following European countries had its credit ratings downgraded in the summer of 2010 causing widespread panic that it might default on its debt? Hint


Question 9 of 10
9. One of the methods that you may use of transferring the risk from your bank to others willing to bear it is by issuing a catastrophe bond. Can catastrophe bonds be used to insure against loss caused by environmental factors like hurricanes and earthquakes?


Question 10 of 10
10. Finally, there is one risk which can't be mitigated by any of the normal portfolio de-risking strategies. Which of the following fits the description? Hint



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Quiz Answer Key and Fun Facts
1. The Central banks of the G10 countries (which includes UK and USA among others) formed a committee in 1974 which issues guidelines regarding the conduct of banks. Which European city is the committee named after?

Answer: Basel

The committee meets four times a year at the Bank for International Settlements in Basel, Switzerland. The Basel norms deal with the different types of risks that banks have to face and lay down regulatory guidelines that can be followed on a global scale. Most countries require their banks to follow the Basel norms, which are updated periodically.
2. Which of the following terms signifies a basic type of risk that is invoked whenever any lending is involved?

Answer: Credit Risk

Credit risk generally means the possible inability of a borrower to make repayments either on time or at all. Lenders try to minimize the potential loss by buying credit insurance in the form of credit default swaps (CDS) or stating certain covenants at the time of sanctioning the loan that the borrower will have to comply with.

In CDSs, the risk is transferred from the person giving the loan to the person selling the insurance against default.
3. Credit rating agencies rate customers based on a number of parameters including their financial strength and their performance relative to industry peers. What is the term used to denote bonds that are below investment grade?

Answer: Junk bonds

While each agency may have a different scale, bonds or companies rated AAA (or its equivalent) are considered to have the highest degree of credit worthiness and the risk increases progressively from AA to C. A rating of D signifies that the company has defaulted on its repayment in the past. Junk bonds typically offer higher returns than other better rated bonds due to the greater risk that they carry.
4. The first loan application you have to deal with concerns a project loan for the construction of a bridge by an infrastructure company. Which of the following is NOT likely to be a factor in your assessment of this project?

Answer: The exact date on which construction is slated to begin.

In project loans, the main source of repayment is generally the cashflow generated by the project itself. Hence any reduction in the actual vehicular traffic and toll as compared to the amount estimated by the company in its projections will hamper the company's repayment capacity.

If the project is stuck due to pending approvals from the authorities concerned, the company may not be able to meet its earlier timelines and you may have to extend the tenure of the loan to help the company repay the loan.

Since the entire project depends on the company's ability to successfully construct the bridge within the stipulated period, it is essential to check if the company has been able to satisfactorily execute similar projects in the past to gauge its capability.

Projects rarely have an exact start date specified since numerous factors may affect this. Usually a tentative date is sufficient for the appraisal process.
5. The next loan application seems like a piece of cake. A well known automobile company with an AAA credit rating and impeccable financials has requested a term loan for a period of five years. Everything seems to be in order and you're just about to approve the loan when you suddenly realize that approving it may increase your concentration risk. Which of the following factors is NOT likely to be a cause for your concern?

Answer: The board of directors of the company.

It's important to keep an eye on the overall portfolio of the bank to ensure that it is not unduly skewed towards any particular industry or region. This helps to safeguard against a downturn in any particular industry which is part of the normal business cycle. Regional concentration risk arises mainly from the possibility of any environmental disaster striking a particular region crippling the businesses operating there.

Any kind of risks concerning the board of directors (whether their integrity or capability) fall under management risk.
6. If the loan amount is too high, two or more financiers may decide to get together to service it. In such an arrangement, if you are told that your charge on the security offered by the borrower is pari passu to that of the other lenders, what does it mean?

Answer: All the lenders have equal charge over the security.

'Pari passu' is a Latin term that translates to 'equal footing'. If all the lenders have pari passu charge on the assets pledged by the borrower, it means all of them have equal rights of repayment. In case of a default, the assets can be sold and all the lenders will have equal rights on the proceeds of the sale.
7. Apart from the regular risks to be assessed in every business loan proposal, which of the following is an additional risk to be considered when funding a company that has its major suppliers or buyers based outside the country?

Answer: Currency risk

Since there is generally a time lag between placing orders and receiving the delivery, the exchange rate of the two currencies may not remain the same. If there's a drastic change, the order may even become unfeasible for one of the parties. Some companies enter into contracts to hedge this risk, thus limiting any potential loss.
8. As a banker you may also choose to invest in the bonds issued by another country. Sovereign risk is a type of risk specific to this kind of investment. Which of the following European countries had its credit ratings downgraded in the summer of 2010 causing widespread panic that it might default on its debt?

Answer: Greece

The deteriorating condition of the Greek economy sparked fears that it will be unable to service its debt in 2009. In April 2010, Standard & Poor downgraded the credit rating of Greece to junk status amidst concerns regarding its financial stability and the high deficit between the country's income and expenditure. Being a part of the European Union, Greece has limited control over its monetary policy and is unable to depreciate its currency - a common tool used in similar circumstances by other countries in the past. Eventually a 110 billion euro loan bailout funded by Germany and other European Union countries along with the International Monetary Fund helped Greece tide over the crisis.

Other countries where similar concerns were raised during the same period were Portugal, Spain and Ireland.
9. One of the methods that you may use of transferring the risk from your bank to others willing to bear it is by issuing a catastrophe bond. Can catastrophe bonds be used to insure against loss caused by environmental factors like hurricanes and earthquakes?

Answer: Yes

A bank (or any other entity) can issue a catastrophe bond as a form of insurance against natural disasters. Investors willing to take the risk can purchase the bond and earn the return promised. If the disaster does strike, then investors have to forfeit the amount paid for purchasing the bond and the money is used by the bank to make up for its losses.
10. Finally, there is one risk which can't be mitigated by any of the normal portfolio de-risking strategies. Which of the following fits the description?

Answer: Systemic Risk

Systemic risk refers to the collapse of the financial system as a whole. Since there is a great degree of interlinkage and interdependence within the financial system, a failure of one of the big banks or financial institutions can have a cascading ('domino') effect on the others destabilizing the entire industry.

The US subprime mortgage crisis of 2008 and the ensuing global financial crisis is an example of systemic risk. Even regular de-risking strategies like portfolio diversification and hedging can't reduce the inherent systemic risk.
Source: Author zorba_scank

This quiz was reviewed by FunTrivia editor bloomsby before going online.
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