5530 Ch11

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Chapter 11: 4, 7, 8, 10, 11, 12, 14, 15, 18, 20, 21, 22, 23, 24, 26, 27 Chapter Eleven Credit Risk: Individual Loan Risk Chapter Outline Introduction Credit Quality Problems Types of Loans • Commercial and Industrial Loans • Real Estate Loans • Individual (Consumer) Loans • Other Loans Calculating the Return on a Loan • The Contractually Promised Return on a Loan • The Expected Return on a Loan Retail versus Wholesale Credit Decisions • Retail • Wholesale Measurement of Credit Risk Default Risk Models • Qualitative Models • Quantitative Models Summary Appendix 11A: Credit Analysis (www.mhhe.com/saunders7e) Appendix 11B:…show more content…
5. What are the primary characteristics of residential mortgage loans? Why does the ratio of adjustable-rate mortgages to fixed-rate mortgages in the economy vary over an interest rate cycle? When would the ratio be highest? Residential mortgage contracts differ in size, the ratio of the loan amount to the value of the property, the maturity of the loan, the rate of interest of the loan, and whether the interest rate is fixed or adjustable. In addition, mortgage agreements differ in the amount of fees, commissions, discounts, and points that are paid by the borrower. The ratio of adjustable-rate mortgages to fixed-rate mortgages is lowest when interest rates are low because borrowers prefer to lock in the low market rates for long periods of time. When rates are high, adjustable-rate mortgages allow borrowers the potential to realize relief from high interest rates in the future when rates decline. 6. What are the two major classes of consumer loans at U.S. banks? How do revolving loans differ from nonrevolving loans? Consumer loans can be classified as either nonrevolving or revolving loans. Automobile loans and fixed-term personal loans usually have a maturity date at which time the loan is expected to have a zero balance, and thus they are considered to be nonrevolving loans. Revolving loans usually involve credit card debt, or similar lines of credit, and as a result the balance will

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