Practice Question Set: Doumpos et al., Analytical Techniques in the Assessment of Credit Risk, Chapters 1 & 2

Doumpos et al., Analytical Techniques in the Assessment of Credit Risk, Chapters 1 & 2 Practice Questions cover the following learning objectives:

Chapter 1. Introduction to Credit Risk Modeling and Assessment

Explain the capital adequacy, asset quality, management, earnings, and liquidity (CAMEL) system used for evaluating the financial condition of a bank.
Describe quantitative measurements and factors of credit risk, including probability of default, loss given default, exposure at default, expected loss, and time horizon.
Estimate capital adequacy ratio of a financial institution.
Describe the judgmental approaches, empirical models, and financial models to predict default.
Apply the Merton model to calculate default probability and the distance to default and describe the limitations of using the Merton model.
Compare and contrast different approaches to credit risk modeling, such as those related to the Merton model, Credit Risk Plus (CreditRisk+), CreditMetrics, and the Moody’s-KMV model.
Apply risk-adjusted return on capital (RAROC) to measure the performance of a loan.

Chapter 2. Credit Scoring and Rating

Compare the credit scoring system to the credit rating system in assessing credit quality and describe the different types of each system.
Distinguish between through-the-cycle and point-in-time credit rating systems.
Describe the process for developing credit risk scoring and rating models.
Describe rating agencies’ assignment methodologies for issue and issuer ratings, and identify the main criticisms of the credit rating agencies’ ratings.

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