CHAP 6: Overview of Credit Policy and Loan Characteristics

The largest single loan category for all banks is:
a. real estate loans.
b. commercial loans.
c. credit card loans.
d. industrial loans.
e. agricultural loans.

a

The highest ROA and charge-off rates in 2012 were reported by:
a. agricultural banks.
b. credit card banks.
c. commercial lenders.
d. consumer lenders.
e. international banks.

b

Widespread use of credit scoring:
a. standardizes the perceived quality of different loan types.
b. decreases the supply of credit.
c. increases market interest rates.
d. reduces the costs of the associated loans.
e. all of the above.

a

The vast majority of FDIC-insured institutions are classified as:
a. credit card banks.
b. agricultural banks.
c. consumer lenders.
d. commercial lenders.
e. mortgage lenders.

d

To be classified as a non-current loan, payments must be past due a minimum of how many days?
a. 30 days
b. 60 days
c. 90 days
d. 120 days
e. 158 days

c

The risk of potential loss of interest and principal on international loans due to borrowers in a country refusing to make timely payments, as per the loan agreement is known as what type of risk?
a. International risk
b. Foreign risk
c. Continent risk
d. Country risk
e. Government risk

d

Large firms can obtain funds from which of the following?
a. Equity financing
b. Issuing commercial paper
c. Issuing long-term bonds
d. Loans from commercial banks
e. All of the above

e

When a bank lends in a narrow geographic area, they are subject to:
a. country risk.
b. concentrated risk.
c. historical risk.
d. charge-off risk.
e. portfolio risk.

b

In the credit process, which of the following activities falls under Business Development and Credit Analysis?
a. Loan committee reviews
b. Loan documentation review
c. Officer call programs
d. Perfect security interest
e. Process loan payments

c

In the credit process, which of the following activities falls under Credit Review?
a. Loan committee reviews
b. Perfecting the security interest
c. Market research
d. Review loan documentation
e. Market research

d

In the credit process, which of the following activities falls under Credit Execution and Administration?
a. Financial statement analysis
b. Evaluate collateral
c. Officer call programs
d. Review loan documentation
e. Monitor compliance with loan agreement

a

Which of the following formalizes a bank's lending guidelines?
a. Loan policy
b. Credit culture
c. Credit analysis
d. Credit review
e. Loan documentation

a

Which of the following refers to the principles that drive a bank's lending activity?
a. Loan policy
b. Credit culture
c. Credit analysis
d. Credit review
e. Loan documentation

b

Which of the following is the primary emphasis of a values-driven credit culture?
a. Annual bank profit
b. Bank soundness and stability
c. Loan volume
d. Loan growth
e. Short-term earnings

b

A security interest in a loan is said to be perfected if the:
a. bank holds the collateral.
b. loan has no protective covenants.
c. borrower is a low credit risk.
d. government guarantees the loan.
e. bank has never lent to the customer before.

a

Which of the following is not one of the five Cs of (good) credit?
a. Character
b. Collateral
c. Capital
d. Capacity
e. Communication

e

The ability to repay a loan is measured by a firm's:
a. capacity.
b. collateral.
c. character.
d. capital.
e. credit.

a

The lender's secondary source of repayment in case of default is:
a. capacity.
b. collateral.
c. character.
d. capital.
e. credit.

b

Which of the following is not one of the five Cs of bad credit?
a. Complacency
b. Contention
c. Contingencies
d. Competition
e. Carelessness

b

Which of the following refers to a lender's tendency to ignore circumstances in which a loan might default?
a. Complacency
b. Contention
c. Contingencies
d. Competition
e. Carelessness

c

Loan covenants:
a. protect the borrower from lender interference in management.
b. are limited to "negative" provisions.
c. may limit discretionary cash outlays by firms.
d. are seldom enforced.
e. often result in the lender's bankruptcy.

c

When a bank's claim to collateral is superior to all other creditors, the claim is said to be:
a. developed.
b. guaranteed.
c. certified.
d. perfected.
e. endorsed.

d

Which of the following would be considered a "negative" loan covenant?
a. The firm's current ratio cannot fall below 2.0
b. All property must be maintained in good condition
c. The firm's net worth must exceed $10,000,000
d. The firm must carry property insurance on all collateral.
e. Cash dividends cannot exceed 50% of earnings.

e

Which of the following would be considered a "positive" loan covenant?
a. Days receivables outstanding cannot exceed 30 days
b. No change in senior management
c. Capital outlays cannot exceed $1,000,000 per year
d. No additional liens may be placed on the collateral
e. The bank must approve any firm mergers or acquisitions

a

All of the following are loan classifications under the Uniform Bank Performance Report except:
a. real estate loans.
b. automobile loans.
c. individual loans.
d. commercial loans.
e. agricultural loans.

b

Which of the following would be considered an interim loan?
a. Automobile loan
b. Residential mortgage loan
c. Construction loan
d. Home equity loan
e. Student loan

c

Loans that finance the construction of roads and public utilities in new subdivisions are labeled:
a. public work loans.
b. take-out loans.
c. domestic loans.
d. land development loans.
e. working capital loans.

d

Positive working capital for a firm implies:
a. the firm has no short-term debt.
b. the firm has no seasonal cash flow needs.
c. that current assets are completely financed by current liabilities.
d. the firm has no long-term debt.
e. that current assets are partially financed by long-term debt and equity.

e

Days accruals 11
Days cash 5
Days inventory 29
Days accounts payables 19
Days accounts receivables 31

Average Daily COGS $18

29. What is the firm's cash-to-cash asset cycle?
a. 30 days
b. 59 days
c. 65 days
d. 95 days
e. 113 days

30. What is the firm's liability cycle?
a. 30 days
b. 59 days
c. 65 days
d. 95 days
e. 113 days

31. What are the firm's estimated working capital needs?
a. $90
b. $540
c. $630
d. $1,170
e. $2,034

c. 65 days
a. 30 days
c. $630

Days accruals 10
Days cash 7
Days inventory 33
Days accounts payables 21
Days accounts receivables 35

Average Daily COGS $15

32. What is the firm's cash-to-cash asset cycle?
a. 31 days
b. 44 days
c. 65 days
d. 75 days
e. 121 days

33. What is the firm's liability cycle?
a. 21 days
b. 31 days
c. 65 days
d. 75 days
e. 121 days

34. What are the firm's estimated working capital needs?
a. $90
b. $315
c. $660
d. $1,125
e. $2,250

d. 75 days
b. 31 days
c. $660

A loan where the entire principal is due at maturity is called a:
a. installment loan.
b. sinking fund loan.
c. mezzanine loan.
d. bullet loan.
e. highly leverage transaction loan.

d

_______________________ represents the amount of long-term financing required for current assets.
a. Permanent working capital
b. Seasonal working capital
c. Secondary working capital
d. Perpetual working capital
e. Passive working capital

a

A _______________________ is a post office box number controlled by the bank.
a. syndication
b. local
c. lockbox
d. maintenance box
e. microhedge

c

Asset based loans:
a. are not generally tied to inventory.
b. include loans to finance leveraged buyouts.
c. put more weight on cash flow than collateral when evaluating the loan.
d. All of the above.
e. None of the above.

b

Banks rarely provide:
a. start-up capital loans.
b. mortgage loans.
c. automobile loans.
d. agricultural loans..
e. commercial loans.

a

Venture capital financing that comes in the "later rounds" of financing may take the form of:
a. start-up capital loans.
b. mezzanine financing.
c. automobile financing.
d. seed money.
e. staff financing.

b