Deck 17: Lending to Business Firms and Pricing Business Loans

Question 1

Working capital loans often require _____________________.These are required deposits in the bank by the borrower whose size is dependent on the size of the credit line.

Answer 1

compensating deposit balances

Question 2

______________________ examines how effectively assets are being utilized to generate sales and how efficiently sales are converted into cash.

Answer 2

Operating efficiency

Question 3

______________________ refers to the protection afforded to creditors of a firm based on the amount of the firm's earnings.

Answer 3

Coverage

Question 4

____________________________________________ are the other potential claims against the borrower which do not show up on the borrower's balance sheet.One new form of this is due to environmental damage by the borrower.

Question 5

_____________________________ are the ultimate standards of performance in a market-oriented economy.These measure the net income that remains for owners after all expenses (except stockholder dividends)have been charged against revenues.

Question 6

A(n)______________________ is a loan extended to a business firm by a group of lenders in order to reduce the risk exposure to any one lending institution and to a earn fee income.

Question 7

A(n)______________________ is the purchase of a publicly traded company by a small group of investors.These investors often borrow very heavily to finance the purchase of the stock of the company.

Question 8

______________________ are designed to fund long-term investments such as the purchase of equipment.Money is borrowed in one lump sum and repayments are generally made in installments.

Question 9

A(n)_________________________________________ is a contractual promise by a bank to lend to a customer up to a maximum amount of money at a set interest rate (or rate markup over the rate prime or LIBOR).The only way the bank can renege on its promise is if there has been a "material adverse change" in the borrower's financial condition.

Question 10

When the title to accounts receivables pledged in an asset-based loan is passed to the lender and the lender takes the responsibility of collecting the accounts receivables of one of its business customers,this is called ____________________.

Question 11

_____________________ is the rate on short-term Eurocurrency deposits which range in maturity from a few days to a few months.

Question 12

The ______________________ is the interest rate charged to the bank's most creditworthy customers on short-term working capital loans.

Question 13

A(n)__________________________________ is generally used to finance the purchase of inventory to sell and take advantage of the firm's normal cash cycle to repay the loan.

Question 14

Wages and salaries to net sales,overhead expenses to net sales,and cost of goods sold to net sales are all measures of ___________________________________________.

Question 15

The ______________________ approach to pricing a loan starts with a base interest rate and adds a risk premium for default and for time to maturity.

Question 16

_________________________________ is a way to price loans which starts with the costs of making a loan and adds to it a risk premium for default risk and a desired profit margin.

Question 17

The borrower's ______________________ position reflects his or her ability to raise cash in a timely fashion at a reasonable cost.

Question 18

The ______________________________ is a way to price loans which allows banks to compete with the commercial paper rate.

Question 19

A(n)______________________ is generally used to support the construction of homes,apartments,office buildings,and other permanent structures.

Question 20

______________________ refers to the borrowers' use of debt in their firm.

Question 21

Weak loans considered to be substandard or doubtful are also known as __________ credits.

Question 22

The ______________________________________ is the risk premium that has to do with the quality of the borrower.

Question 23

An interest rate most widely used to price large-denomination business loans extended by banks operating in the U.S.is ________.

Question 24

___________ loans represent the earliest form of lending that banks have carried out in their more than 2,000-year history.

Question 25

A third financial statement,used in addition to the income statement and balance sheet by lenders,is the __________.It is required by FASB and is usually readily available from borrowers.

Question 26

SNCs are also known as _____________ loans.

Question 27

____________ is a type of short-term loan,where the business lenders support installment purchases of automobiles,home appliances,furniture,business equipment,and other durable goods by financing the receivables that dealers take on when they write installment contracts to cover customer purchases.

Question 28

A firm's balance sheet figures expressed as a percentage of total assets are often called __________.

Question 29

_____________ provide businesses with short-term credit,lasting from a few days to about one year.These loans come close to self-liquidating loans.

Question 30

The most risky of all business loans are __________.This is credit to finance the construction of fixed assets designed to generate a flow or revenue in future periods.This can include financing a new oil refinery,power plant,or other similar fixed assets.

Question 31

____________________________ is the cost to the lender for borrowing adequate funds in the cost-plus loan pricing model.

Question 32

Foreclosure on property pledged behind a bank loan does not subject a bank to be held liable to clean up any environmental damage the borrower may have caused.

Question 33

The _______________________ is the risk premium that has to do with the time to maturity on the borrowed funds.

Question 34

The ___________ is considered to be the most common base rate figure announced by the majority of the largest banks that publish their loan rates regularly.

Question 35

In the price leadership model,the amount above the prime rate is often called the ____________.

Question 36

The ______________________ is a way of pricing loans that allows a bank to take into account the entire relationship the bank has with the customer when pricing the loan.

Question 37

A proposed loan is acceptable to the lender when the net rate of return from a customer profitability analysis is _____________________.

Question 38

The advent of inflation and more volatile interest rates gave rise to a(n)____________,tied to changes in important money market interest rates such as the 90-day commercial paper rate.

Question 39

______________________ is the average deposit balance by the customer minus the average float adjusted for reserve requirements.

Question 40

The apparent size bias in the financial marketplace led to the creation of the __________ in the 1950s,to guarantee loans made to small businesses by private lending institutions.

Question 41

A project loan is granted to several companies jointly sponsoring a large project,and the lender can recover funds from such sponsoring companies,if the project does not pay out as planned.This is known as a project loan granted on a recourse basis.

Question 42

Term loans normally are secured by accounts receivable and inventory.

Question 43

The firm's coverage ratios measure how carefully the firm's management monitor and control its expenses.

Question 44

A concern in the banking and commercial finance industries today is that traditional inventory loans may be on the decline.

Question 45

An increasing portion of short-term lending in recent years has consisted of asset-based loans.

Question 46

When a bank examines a borrower's operating efficiency,it is looking at the protection afforded to creditors from the borrower's earnings.

Question 47

Working-capital loans,unlike most other types of business loans,usually require the customer to keep a compensating deposit balance with the lending bank.

Question 48

The price leadership model for long-term loan pricing includes a markup for default risk,but not for term risk.

Question 49

Self-liquidating business loans are designed to take advantage of the normal cash cycle in a business firm.

Question 50

Liquidity indicators measure a business firm's ability to raise cash in a timely fashion at a reasonable cost.

Question 51

To avoid environmental liability under recent EPA guidelines,a lender must hold a deed of trust,lien,or mortgage.

Question 52

Term loans look primarily to the flow of future earnings of the borrowing business firm to amortize and retire its loan.

Question 53

The business loan pricing method that relies upon banks knowing their costs,is the price leadership model.

Question 54

Leveraged buyouts (LBOs)involve the purchase of businesses with at least 75 percent of the cost of the purchase funded by current earnings and sales of stock.

Question 55

Working capital loans are normally secured by a business firm's plant and equipment.

Question 56

Under recent EPA guidelines,if a lender forecloses on environmentally damaged property,the lender must post that property for sale within 12 months after securing marketable title.

Question 57

Floor planning agreements typically include a loan-loss reserve,built up from interest earned as borrowers repay their installment loans.

Question 58

The ultimate standard of performance in a market-oriented economy is how much net income remains after all expenses (except stockholder dividends)have been charged against revenues.

Question 59

If a bank's agent visits a dealer using floor planning and finds any inventory items sold for which the bank providing finance has not received payment,the loan will be immediately foreclosed upon.

Question 60

Under current federal laws,a lender is required to make an environmental site assessment of the borrower's property in order to avoid environmental liability.

Question 61

The loan-pricing technique known as CPA,can be used to identify the most profitable types of bank customers,loans,and also the most successful loan officers.

Question 62

The basic weakness of the cost-plus loan pricing method is that it gives little regard to the competition from other lenders while setting the loan price.

Question 63

The amount of business lending tends to fall during recessionary periods.

Question 64

In a period of rising interest rates,the times-prime method causes the customer's loan rate to rise faster than the prime-plus method.

Question 65

The basic strength of the cost-plus loan pricing method is that it considers the competition from other lenders.

Question 66

A majority of classified syndicated loans are held by banks.

Question 67

The basic strength of the below-prime market pricing model is that it allows the bank to lend at low money market interest rates plus a small margin to cover risk exposure and provide a profit margin.

Question 68

Syndicated loans are a type of working capital loan.

Question 69

Short-term lending to support the construction of homes,apartments,office buildings,shopping centers,and other permanent structures is known as a (or an):

A)self-liquidating.
B)working capital loan.
C)interim construction loan.
D)asset-based loan.
E)None of the options is correct.

Question 70

A loan whose principal is not due to be paid back until the loan's term ends and in which only interest is paid periodically during the life of the loan is called a (or an):

A)working capital loan.
B)project loan.
C)bullet loan.
D)interim construction loan.
E)None of the options is correct.

Question 71

The sum of the default-risk premium plus the term-risk premium on a business loan is one of the elements of the cost-plus loan pricing method.

Question 72

The loan-pricing method,that takes the whole customer relationship into account when pricing each loan request,is known as the cost-benefit loan pricing method.

Question 73

If interest rates fall,a customer's loan rate will decline more rapidly under the times-prime method than under the prime-plus method of business loan pricing.

Question 74

In order to control the risk exposure on their business loans most banks use both price and credit rationing to regulate the size and composition of their loan portfolios.

Question 75

The basic strength of the below-prime market pricing model is that there are narrow margins or markups on loans.

Question 76

The amount of business lending tends to rise during periods of expansion.

Question 77

Banks attempting to compete with the growing commercial paper market developed the cost-plus business loan pricing method.

Question 78

Business loans designed to fund long-term business investments,such as the purchase of equipment or the construction of physical facilities,covering a period longer than one year are known as:

A)working capital loans.
B)term loans.
C)interim construction financing.
D)durable goods loan.
E)None of the options is correct.

Question 79

According to the textbook,small business lending by banks is on the decline.

Question 80

A credit agreement in which a business customer may borrow up to a pre-specified limit,repay all or a portion of the borrowing,and reborrow as necessary until the credit line matures is known as a(an):

A)interim construction.
B)project loan.
C)working-capital loan.
D)revolving credit line.
E)None of the options is correct.