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Financial Forensics · Quiz 2 · 6 Aug 2023 · May 2023 term

Question 23: Suppose a bank is analyzing the credit risk of a group o…

Question 23

+1 markOne correct option

Suppose a bank is analyzing the credit risk of a group of borrowers over a period of four quarters (Q1, Q2, Q3, and Q4). The bank uses the "roll forward rate" to assess the probability of default for these borrowers during this time. The following table shows the number of borrowers in different credit risk categories:

QuarterLow Credit RiskModerate Credit RiskHigh Credit Risk
Q130001500500
Q228001600400
Q326001700300
Q424001800200

What does the roll forward rate indicate about the credit risk migration of borrowers from Q1 to Q4?

  1. A

    Borrowers with high credit risk in Q1 significantly improved their credit risk status by Q4.

  2. B

    The credit risk status of borrowers remained stable with no significant changes over the quarters.

  3. C

    Borrowers with low credit risk in Q1 are likely to have a higher probability of default by Q4.

  4. D

    The number of borrowers in each credit risk category decreased steadily over the quarters.

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Correct answer

  • A

    Borrowers with high credit risk in Q1 significantly improved their credit risk status by Q4.

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Question 23 of 25 in the IIT Madras BS Financial Forensics (Financial Forensics) Quiz 2 paper sat on 6 Aug 2023, in the May 2023 term (IIT M DEGREE AN3 EXAM QPE3 06 Aug 2023). It carries 1 mark.

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