WEDNESDAY: 15 December 2021. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question.
QUESTION ONE
1. Analyse four factors that determine the amount of working capital. (8 marks)
2. Discuss three techniques used by financial institutions to manage portfolios and control concentration risks. (6 marks)
3. Outline six important elements of an effective loan portfolio management process. (6 marks)
(Total: 20 marks)
QUESTION TWO
1. With reference to Base II Accord, highlight four conditions necessary for default to occur. (4 marks)
2. Outline four collaterals that could be used to secure repayment of project finance. (4 marks)
3. Explain four benefits of credit risk models. (8 marks)
4. Enumerate four consequences of overtrading. (4 marks)
(Total: 20 marks)
QUESTION THREE
1. Explain the following terms as used in portfolio risk:
Systematic risk. (2 marks)
Diversifiable risk. (2 marks)
2. Banks need to develop and implement comprehensive procedures and information systems to monitor the condition of individual credits across various portfolios offered by the banks.
With reference to the above statement, enumerate three benefits that accrue from the measures implemented by banks to ensure effective credit monitoring systems. (6 marks)
3. Examine the following methods of perfection of a security:
Perfection by possession. (3 marks)
Perfection by control. (3 marks)
4. List four examples of credit derivatives. (4 marks)
(Total: 20 marks)
QUESTION FOUR
1. A risk based pricing model must be clear and conspicuous.
With reference to the above statement, enumerate four information contained in a risk-based pricing model that a consumer should be made aware of. (4 marks)
2. Differentiate between “positive working capital” and “negative working capital”. (4 marks)
Describe three benefits of managing working capital in a business. (6 marks)
3. Analyse six critisms against Basel II in connection with financial crisis of 2008. (6 marks)
(Total: 20 marks)
QUESTION FIVE
1. Explain “Merton model” as used in credit risk modelling. (3 marks)
Examine six assumptions of the Merton model. (6 marks)
2. According to International Reporting Standard No.9 (IFRS 9), Financial Instruments are defined as a contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another entity.
With reference to the above statement, list five types of financial assets as outlined under IFRS 9. (5 marks)
3. Discuss the following methods of measuring financial assets:
Amortised cost. (2 marks)
Fair value with changes in other comprehensive income (equity). (2 marks)
Fair value through profit and loss. (2 marks)
(Total: 20 marks)
