Question 1

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.

Accepted Answer

CPA (Contribution to Profitability Analysis) is a loan-pricing technique that can help to identify the most profitable types of bank customers, loans, and also the most successful loan officers.

Question 2

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.

Accepted Answer

The cost-plus loan pricing method mainly focuses on recovering the cost of capital and adding a markup for profit, without taking into consideration the competition from other lenders. This can result in pricing loans higher than what the market can bear, leading to potential loss of customers to competitors. Hence, the statement is true.

Question 3

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

Accepted Answer

During recessionary periods, there is usually a decrease in demand for loans due to the lack of opportunities for businesses to invest and expand. Also, banks become more risk-averse and tighten their lending standards, making it more difficult for businesses to qualify for loans. This results in a decrease in business lending.

Question 4

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.

Accepted Answer

The times-prime method calculates the interest rate by multiplying the prime rate by a predetermined factor, resulting in a higher rate increase when the prime rate rises. In contrast, the prime-plus method adds a fixed percentage to the prime rate, resulting in a smaller increase in the interest rate when the prime rate rises. Therefore, the statement is true - the times-prime method causes the customer's loan rate to rise faster than the prime-plus method in a period of rising interest rates.

Question 5

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

Accepted Answer

The cost-plus loan pricing method determines the interest rate by adding a markup to the cost of funds but does not take into account competition from other lenders.

Question 6

A majority of classified syndicated loans are held by banks.

Accepted Answer

The answer of A majority of classified syndicated loans are...

Question 7

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.

Accepted Answer

The statement is true. The below-prime market pricing model allows banks to offer lower interest rates to borrowers with less-than-perfect credit scores, but still earn a profit by adding a small margin to cover their risk exposure and generate a profit margin. This pricing model can help banks attract customers who may not be able to qualify for financing from traditional lenders and increase their lending portfolio.

Question 8

Syndicated loans are a type of working capital loan.

Accepted Answer

Syndicated loans are financing offered by a group of lenders who work together to provide funds for a single borrower, typically used for large projects or acquisitions, not specifically for working capital.

Question 9

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

Accepted Answer

Interim construction loan is the short-term lending option used to support the construction of homes, apartments, office buildings, shopping centers, and other permanent structures. It is designed to provide the necessary funding for construction until the project is completed, and long-term financing can be obtained. Therefore, the most appropriate choice is C. The other options are not relevant to this context.

Question 10

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):

Accepted Answer

This type of loan is commonly known as a bullet loan, as the repayment of the principal is due in one lump sum at the end of the loan's term, resembling the firing of a bullet. The borrower is only required to make interest payments during the life of the loan, which can have advantages for cash flow management. Working capital loans are typically shorter-term loans used to finance daily business operations, while project loans are designed for specific projects and often have a defined repayment schedule. Interim construction loans provide financing for the construction of a property and are typically repaid through a permanent mortgage once the project is complete.

Question 11

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.

Accepted Answer

The answer of The sum of the default-risk premium plus...

Question 12

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.

Accepted Answer

The loan-pricing method that takes the whole customer relationship into account when pricing each loan request is known as relationship-based loan pricing, not cost-benefit loan pricing. Cost-benefit loan pricing focuses on the costs and benefits of the specific loan request rather than the overall relationship with the customer.

Question 13

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.

Accepted Answer

Under the times-prime method, the customer's loan rate is directly linked to the current prime rate, so any decline in the prime rate will lead to a corresponding decline in the customer's loan rate. In contrast, under the prime-plus method, the loan rate is determined by adding a fixed percentage (the "spread") to the prime rate, so changes in the prime rate may not have an immediate impact on the loan rate. Therefore, if interest rates fall, the customer's loan rate will decline more rapidly under the times-prime method than under the prime-plus method.

Question 14

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.

Accepted Answer

Banks use a combination of price and credit rationing to manage their loan portfolios and control their risk exposure. Price rationing involves adjusting the interest rates charged on loans to reflect the level of risk involved, while credit rationing involves limiting the availability of credit to higher-risk borrowers. Both approaches are used to ensure that banks maintain a balanced and diversified loan portfolio that is aligned with their risk tolerance and profitability goals.

Question 15

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

Accepted Answer

The below-prime market pricing model is based on providing loans to borrowers with lower credit scores or poor credit histories at a relatively higher interest rate than prime borrowers. However, the model follows narrow margins or markups on loans to mitigate the risk of default and cover operational costs, making it a cost-effective way for lenders to provide loans to subprime borrowers. Therefore, the statement is true.

Question 16

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

Accepted Answer

During periods of economic expansion, businesses tend to experience growth and increased demand for their products or services. As a result, they may need to borrow funds to invest in equipment, inventory, or other resources to capitalize on the opportunities presented by the expanding economy. This typically leads to a rise in business lending.

Question 17

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

Accepted Answer

The answer of Banks attempting to compete with the growing...

Question 18

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:

Accepted Answer

Term loans are specifically designed to fund long-term investments that cover a period of more than one year. These loans are generally used for purchasing equipment, constructing facilities, or other business purposes that require a large amount of upfront capital. Working capital loans, on the other hand, are short-term loans that are designed to cover immediate expenses and address cash flow issues. Interim construction financing is a type of loan that is specifically designed for financing the construction of physical facilities, and durable goods loan is not a recognized term in the context of business financing. Therefore, the best choice is B) term loans.

Question 19

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

Accepted Answer

The textbook states that small business lending by banks has been on the decline since the financial crisis of 2008.

Question 20

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):

Accepted Answer

A revolving credit line is a type of credit agreement in which a business customer can borrow up to a pre-specified limit and repay all or a portion of the borrowing, and then reborrow as needed until the credit line matures. It is a flexible way for businesses to manage their cash flow and working capital needs.

Quiz 17: Lending to Business Firms and Pricing Business Loans