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    TUT4

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    Huế Hoàng
    Credit risk is the risk that a loan's principal and interest will not be paid on time. Expert systems for analyzing loan proposals rely heavily on the analyst's subjective judgment, making them prone to ambiguity and less effective for complex loans. Statistical tools have made credit analysis more objective by introducing benchmarks, but cannot be the sole basis for decisions as they omit important risk factors like terms, conditions, covenants, and seniority. Discriminant analysis distinguishes between creditworthy and non-creditworthy borrowers using a limited number of characteristics, while hybrid systems utilize recognized credit risk models.

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    TUT4

    Uploaded by

    Huế Hoàng
    18 views2 pages
    Credit risk is the risk that a loan's principal and interest will not be paid on time. Expert systems for analyzing loan proposals rely heavily on the analyst's subjective judgment, making them prone to ambiguity and less effective for complex loans. Statistical tools have made credit analysis more objective by introducing benchmarks, but cannot be the sole basis for decisions as they omit important risk factors like terms, conditions, covenants, and seniority. Discriminant analysis distinguishes between creditworthy and non-creditworthy borrowers using a limited number of characteristics, while hybrid systems utilize recognized credit risk models.

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    MCQ Business Statistic R OUTCOME

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    Credit risk is the risk that a loan's principal and interest will not be paid on time. Expert systems for analyzing loan proposals rely heavily on the analyst's subjective judgment, making them prone to ambiguity and less effective for complex loans. Statistical tools have made credit analysis more objective by introducing benchmarks, but cannot be the sole basis for decisions as they omit important risk factors like terms, conditions, covenants, and seniority. Discriminant analysis distinguishes between creditworthy and non-creditworthy borrowers using a limited number of characteristics, while hybrid systems utilize recognized credit risk models.

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    © All Rights Reserved
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    18 views2 pages

    TUT4

    Uploaded by

    Huế Hoàng
    Credit risk is the risk that a loan's principal and interest will not be paid on time. Expert systems for analyzing loan proposals rely heavily on the analyst's subjective judgment, making them prone to ambiguity and less effective for complex loans. Statistical tools have made credit analysis more objective by introducing benchmarks, but cannot be the sole basis for decisions as they omit important risk factors like terms, conditions, covenants, and seniority. Discriminant analysis distinguishes between creditworthy and non-creditworthy borrowers using a limited number of characteristics, while hybrid systems utilize recognized credit risk models.

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    of 2

    TUT4

    1. Define credit risk.


    - Credit risk is the risk that the principal and interest payable on a loan will not be paid in a
    timely manner. For most loans, documentation generally defines this as on or before the
    due date.
    2. What are expert systems? Outline the problems with relying on expert systems
    - Expert systems are procedures for analysing loan proposals that are largely based on the
    skill of the credit analyst. They are normally applied using acronyms such as the 5 C’s or
    PARSER. A characteristic of expert systems is that financial analysis takes up little
    part of the overall analysis. In other words, the much of the analysis tends to be
    subjective rather than objective. Ratio analysis tends to be the only objective analysis for
    this procedure. It is the subjectivity that causes the most problem for expert systems.
    Both the analysis of the framework and the data can be ambiguous. In addition to this,
    there is no doubt that the more complex the loan, the less appropriate
    3. What is the basis of using market-based risk premiums? Why do credit analysts not use
    them more regularly?
    - The basis of market-based premiums is that the probability of repayment or default risk
    of a loan can be determined from the term structure of credit risk. This is a similar
    concept to the term structure of interest rates. Simply put, it is the probability of
    repayment that makes a lender indifferent between risky corporate debt and risk free
    government debt. The problem with the approach is that it assumes that the premium
    between risk free and risky debt is all credit risk. However, research has been shown that
    the premium is not all credit risks and represents other factors as well. These factors
    include:
    + The liquidity of the debt issue.
    + Any covenants on the debt issue.
    + The seniority of the debt issue
    + Industry issues
    4. How has the development of statistical tools help credit analysts? Explain why these
    tools cannot be the sole basis for decision-making.
    - Prior to the development of statistical tools for credit analysis, loans were made using
    expert systems that used the expertise of the analyst as its basis. They were prone to error
    due to the reliance of human judgement. The introduction of statistical tools has taken the
    subjectivity out of credit analysis. Instead of human judgement being the basis of
    assessment, statistical tools ensured that more objective measures were used. These
    objective measures can then be measured against a benchmark. However, these tools
    cannot be the sole basis for decision-making for the following reasons:
    + They tend not to have the value of the loan as part of the assessment
    + They do not model terms, conditions and covenants.
    + They do not have seniority as part of their models.
    + They ignore the relationship, (which could be a good thing).
    + No matter how comprehensive the model, they may omit at least one variable
    that is important for credit risk management or measurement
    5. Explain the basis of discriminant analysis for credit analysis and compare it with
    hybrid systems of analysis.
    - Discriminant analysis seeks to distinguish between two populations using a set
    number of characteristics. In short it is a statistical method and does not necessarily
    utilise any financial theory. However, it may assist in the analysis of creditworthy and
    non-creditworthy companies. On the other hand, hybrid systems seek to utilise well-
    recognised models in the explanation of credit risk.The remaining questions are based on
    the following proposal.A financial services provider that provides computer software
    systems approaches you. The company started off as a small private company and has
    grown strongly over the past fifteen years and listed on the Australian Stock Exchange.
    The company has businesses in many off-shore locations, all of which are well-developed
    capital markets. In some parts of the world, the company has near-monopoly markets.As
    part of its strategy, the company uses acquisitions rather than growth to continue to
    expand the business. While the business is software based, it relies on continued activity
    in the financial markets.The company has had the same management over the past
    fifteen years and the senior management team are shareholders in the company.The
    company is rated BBB and its bonds are trading at 3.3 per cent above the
    comparable government bond rate, with the share price being $5.60. Your bank’s
    experience is that the recovery rate in the event of default, the recovery rate is 50 per
    cent.The condensed financial accounts are as follows:

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