Explanation:
A 15-year loan to a new small business in a volatile and competitive industry, especially with minimal collateral, represents a significant risk related to loan duration. The long duration amplifies the risk because it increases the uncertainty surrounding the business's ability to succeed and remain financially stable over such a lengthy period, particularly in a rapidly changing industry. The minimal collateral further heightens the risk, as it provides less security for the bank in the event of a default.
A is incorrect because a short-term personal loan of two years carries less risk due to its shorter duration, even if the borrower's credit history is not perfect.
B is incorrect because a five-year loan to a well-established business with a solid plan and collateral is considered less risky, given the business's proven track record and the shorter loan term compared to option D.
C is incorrect because a 30-year home mortgage to a borrower with stable and substantial income is a common practice in mortgage lending. The variable interest rate does introduce some risk, but it is not as significant as the risk in option D.
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Q.5951 A credit risk review team at a bank is evaluating how the duration of loans impacts the bank's risk exposure. Which of the following lending scenarios should be of most concern to the team, specifically in terms of loan duration as a risk factor?
A
A borrower is given a short-term personal loan of two years, even though their credit history shows occasional late payments.
B
A well-established business is granted a five-year loan for expanding its operations, with a solid business plan and collateral.
C
The bank issues a 30-year home mortgage at a variable interest rate to a borrower with a stable and substantial income.
D
A 15-year loan is approved for a new small business venture in a rapidly changing and highly competitive industry, with minimal collateral.
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