1.) Find the expected loss or a borrower who has a default probability of 3% and a loss-given-default of 50%.
2.) Using the Table 5.1, determine the weighted average risk score for a borrower with these characteristics: D/A = .50; CDRC = .75; ROA= 3%; current ratio = 1.10; operating ratio = .80; and LTV = .70. Are these characteristics relatively strong or weak?
3.) Using Table 5.2, determine the risk class for the loan characteristics in problem 2. Assume the borrower is rated average according to the management index (also note the differences in solvency measures)
4.) d. Using Table 5 .4, find the expected loss for the risk class determined in problem 3, assuming that loss-given-default is in class 4.
LGD (%) Table 5-3 Loss-GIVEN-DEFAULT CLASSIFICATIONS Class Degree of Security Exceptionally well secured Well secured Adequately secured Marginally secured Under secured UWN 100 Table 5-2 EXAMPLE Risk RATING MODEL Solvency Liquidity Borrower (check) Borrower (check) Risk Class VOUDWN- 0.00 0.00 0.03 0.04 0.24 0.46 0.67 0.90 2.16 3.20 7.76 1228 27.17 Above 0.89 0.80-0.89 0.75-0.79 0.70-0.74 0.65-0.69 0.60-0.64 0.50-0.59 0.40-0.49 0.30-0.39 0.20_0.29 Below 0.20 Above 3.99 250-3.99 2.00-2.49 1.80-1.99 1.60-1.79 1.40-1.59 1 20-1.39 1.00-1.19 0.B0-0.99 0.60-0.79 Below 0.50 DE Weight (%) Rating Class Weighted Score 1.8 Summary Score Criteria Solvency (EA) Liquidity (CR) Repayment CDRC) Earnings (ROA) Management Weighted Average Score Risk Class Probability of Default 8888 Table 5-1 TRADITIONAL Risk RATING SYSTEM Solvency Risk Class DIA Ratio Borrower Below 20% 21-40% Above 40% Repayment CDRC Ratio Borrower Above 1.25 1.00-1.25 Below 100 Profitability Liquidity ROA Borrower Current ratio Borrower Above Above 125 1.00-1.25 Below 4% Below 1.00 Financial Efficiency Operating ratio Borrower Below 0.65 0.65-0.75 Above 0.75 Collateral LIV Borrow Below 0.60 0.60-0.70 Above 0.70 Summary Score Weighted Criteria Rating Class Weight 6) 0.40 020 0.30 0.30 0.10 Solvency (DA) Repayment ICDRC) Profitability (ROA Liquidity ICR Financial Efficiency Oper) Collateral TV Weighted Average Score Risk Cla Override Class Reasons: 1 to 1.50-1 0.40 1.70 151 to 2.25 -2 Above 2.25 -3 No change Class U DUAL RATINGS LGD (%) Table 5-3 Loss-GIVEN-DEFAULT CLASSIFICATIONS Class Degree of Security Exceptionally well secured Well secured Adequately secured Marginally secured Under secured m in Copyright 2012 by Pearson Education, the TAB T end Table 5-2 EXAMPLE RISK RATING MODEL Solvency quidity Risk Class Borrower (check) Borrower Schock) " ONE Above 0.89 0.80-0.89 0.75-0,79 0.70-0.74 0.65-0.69 0.60-0.64 0.50-0.59 0.40-0.49 0.30-0.39 0.20-0.29 Below 0.20 Above 3.99 2.50-3.99 2.00-2.49 1.00-1.99 1.60-1.79 1.40-1.59 120-139 100-1.19 0.30-0.99 0.60-0.79 Below 0,50 Weight (%) Rating Class Summary Score Criteria Solvency (EA) Liquidity (CR) Repayment (CDRC) Earnings (ROA) Management Weighted Average Score Risk Class Probability of Default DA La fonction achats... Comment rduire s. in LinkedIn W Votre site : Anetou. Les nouveaux rles... Table 5-1 TRADITIONAL RISK RATING SYSTEM Solvency D/A Ratio Borrower Below 20% 21-40% Above 40% Repayment Profitability Liquidity CDRC Ratio Borrower ROA Borrower Current ratio Borrower Above 1.25 X Above 8% Above 125 1.00-1.25 4-8% 1.00-1.25 Below 1.00 Below 1.00 FI Opera Below 0.65-0 Above Below 4 Summary Score Rating Weighted Score Weight (%) Class 0.40 20 Criteria Solvency ( DA) Repayment (CDRC) Profitability (ROA) Liquidity (CR) Financial Efficiency Oper.) Colateral (LTV) Weighted Average Score Risk Class Over-ride Class Reasons: 1 to 1.50 - 1 1.70 1.51 to 2.25 - 2 Above 2.25 - 3 No change LGD (%) Table 5-3 Loss-GIVEN-DEFAULT CLASSIFICATIONS Class Degree of Security Exceptionally well secured Well secured Adequately secured Marginally secured Under secured UWN 100 Table 5-2 EXAMPLE Risk RATING MODEL Solvency Liquidity Borrower (check) Borrower (check) Risk Class VOUDWN- 0.00 0.00 0.03 0.04 0.24 0.46 0.67 0.90 2.16 3.20 7.76 1228 27.17 Above 0.89 0.80-0.89 0.75-0.79 0.70-0.74 0.65-0.69 0.60-0.64 0.50-0.59 0.40-0.49 0.30-0.39 0.20_0.29 Below 0.20 Above 3.99 250-3.99 2.00-2.49 1.80-1.99 1.60-1.79 1.40-1.59 1 20-1.39 1.00-1.19 0.B0-0.99 0.60-0.79 Below 0.50 DE Weight (%) Rating Class Weighted Score 1.8 Summary Score Criteria Solvency (EA) Liquidity (CR) Repayment CDRC) Earnings (ROA) Management Weighted Average Score Risk Class Probability of Default 8888 Table 5-1 TRADITIONAL Risk RATING SYSTEM Solvency Risk Class DIA Ratio Borrower Below 20% 21-40% Above 40% Repayment CDRC Ratio Borrower Above 1.25 1.00-1.25 Below 100 Profitability Liquidity ROA Borrower Current ratio Borrower Above Above 125 1.00-1.25 Below 4% Below 1.00 Financial Efficiency Operating ratio Borrower Below 0.65 0.65-0.75 Above 0.75 Collateral LIV Borrow Below 0.60 0.60-0.70 Above 0.70 Summary Score Weighted Criteria Rating Class Weight 6) 0.40 020 0.30 0.30 0.10 Solvency (DA) Repayment ICDRC) Profitability (ROA Liquidity ICR Financial Efficiency Oper) Collateral TV Weighted Average Score Risk Cla Override Class Reasons: 1 to 1.50-1 0.40 1.70 151 to 2.25 -2 Above 2.25 -3 No change Class U DUAL RATINGS LGD (%) Table 5-3 Loss-GIVEN-DEFAULT CLASSIFICATIONS Class Degree of Security Exceptionally well secured Well secured Adequately secured Marginally secured Under secured m in Copyright 2012 by Pearson Education, the TAB T end Table 5-2 EXAMPLE RISK RATING MODEL Solvency quidity Risk Class Borrower (check) Borrower Schock) " ONE Above 0.89 0.80-0.89 0.75-0,79 0.70-0.74 0.65-0.69 0.60-0.64 0.50-0.59 0.40-0.49 0.30-0.39 0.20-0.29 Below 0.20 Above 3.99 2.50-3.99 2.00-2.49 1.00-1.99 1.60-1.79 1.40-1.59 120-139 100-1.19 0.30-0.99 0.60-0.79 Below 0,50 Weight (%) Rating Class Summary Score Criteria Solvency (EA) Liquidity (CR) Repayment (CDRC) Earnings (ROA) Management Weighted Average Score Risk Class Probability of Default DA La fonction achats... Comment rduire s. in LinkedIn W Votre site : Anetou. Les nouveaux rles... Table 5-1 TRADITIONAL RISK RATING SYSTEM Solvency D/A Ratio Borrower Below 20% 21-40% Above 40% Repayment Profitability Liquidity CDRC Ratio Borrower ROA Borrower Current ratio Borrower Above 1.25 X Above 8% Above 125 1.00-1.25 4-8% 1.00-1.25 Below 1.00 Below 1.00 FI Opera Below 0.65-0 Above Below 4 Summary Score Rating Weighted Score Weight (%) Class 0.40 20 Criteria Solvency ( DA) Repayment (CDRC) Profitability (ROA) Liquidity (CR) Financial Efficiency Oper.) Colateral (LTV) Weighted Average Score Risk Class Over-ride Class Reasons: 1 to 1.50 - 1 1.70 1.51 to 2.25 - 2 Above 2.25 - 3 No change
