Deck 9: Commercial and Industrial Lending

Question 1

Banks have expertise in making, monitoring, and collecting commercial loans that cannot be standardized.

Answer 1

True

Question 2

Banks, knowing about asymmetric information, rely exclusively on information from prospective customers when evaluating loan requests.

Answer 2

False

Question 3

Banks avoid credit risk by increasing their credit standards, doing a through credit analysis, and selling their loans to others.

Answer 3

True

Question 4

Commercial and Industrial loans are used primarily to finance working capital and other needs of businesses.

Question 5

Lines of credit should be used to finance plant and equipment.

Question 6

Term loans should be used to finance working capital.

Question 7

The requirement that a borrower must present the bank with quarterly financial statements is an example of a restrictive covenant.

Question 8

Bridge loans are used to finance assets until a specific event occurs.

Question 9

Asset-based lending refers to a specific type of secured lending.

Question 10

A daylight overdraft is usually an unauthorized type of loan.

Question 11

A Material Adverse Change clause refers to a change in the borrower's attitudes about repaying a loan.

Question 12

The prime rate is the interest rate banks offer their best quality customers.

Question 13

Collateral reduces the risk of a loan per se.

Question 14

The characteristics of good collateral include standardization, durability, marketability, and stability of value.

Question 15

Anything can be used as collateral, as long as it is legal.

Question 16

Factoring refers to the use of inventory as collateral.

Question 17

Bankers' Acceptance is a form of trade finance.

Question 18

A Chattel mortgage give a lender a lien against tangible real property.

Question 19

Banks are permitted to lend up to the full amount of their capital on secured real estate transactions that are guaranteed by the Federal National Mortgage Association.

Question 20

A bank's board of directors is responsible to providing guidance in the form of written instructions to loan officers as to the types of loans they should make.

Question 21

The packaging and sale of other unmarketable small size loans is called participations.

Question 22

Collateral is the most important of the 6 Cs of credit.

Question 23

Character refers to a person's honesty and willingness to repay debts.

Question 24

Compliance refers to a person's honesty and willingness to pay debts.

Question 25

Credit analysis should be based on quarterly and annual financia statements provided by the prospective borrower.

Question 26

Collateral refers to any asset pledged for security in a credit transaction.

Question 27

Documentation is used to help management make informed lending decisions and to asses risk as necessary.

Question 28

The prohibition of a borrower from paying cash dividends is an example of an affirmative covenant.

Question 29

Interest cost calculated on a 360-day basis is less than if it were calculated on a 365 day basis.

Question 30

Relationship pricing is based on the total banking relationship between the customer and the bank.

Question 31

Because the cost of equity does not represent a direct interest expense, it should be excluded when pricing loans.

Question 32

Performance pricing is based on the financial condition of the borrower.

Question 33

In structuring a commercial loan agreements, all loans should include the amount to be borrowed, the method of repayment, and the fees to be paid.

Question 34

The term "securitization" refers to:

A) investing in short-term securities
B) investing in long-term securities
C) packaging and selling large loans
D) packaging and selling of otherwise unmarketable loans

Question 35

Loan participations are

A) parts of loans that are sold to banks
B) parts of securitized investments
C) participation in the underwriting
D) downstream investment

Question 36

A loan commitment is

A) an irrevocable promise by the bank to a borrower to extend credit
B) an agreement between a bank and a borrower that the bank may extend credit under certain conditions
C) a form of a standby letter of credit
D) none of the above

Question 37

The term "character" in the Cs of credit refers to

A) the borrower's physical characteristics
B) the borrower's attitudes about banks and loans
C) the borrower's reputation, honesty, and integrity
D) the borrower's representations about collateral

Question 38

Dun & Bradstreet reports provide

A) information about firms with an emphasis on the history of payments and financial condition, liens, bankruptcies, etc.
B) information about the industry in which firms operate
C) financial operating statistics and ratios according to firm size on more than 300 lines of business
D) information about industries, and credit profiles of competitors.

Question 39

Which of the following Cs of credit is the most important?

A) Compliance
B) Capacity
C) Conditions
D) Character

Question 40

Loans made to closely held firms should have

A) guarantees of the principals
B) collateral
C) pro-forma statements
D) relationship pricing

Question 41

The CRA requires lenders

A) to make loans based on the creditworthiness of the borrower
B) the explain to borrowers the credit terms
C) to serve the credit needs of the local communities they serve in a safe and sound fashion
D) to publish their borrowing and lending rates in their loan agreements

Question 42

Banks may deny creditworthy borrowers loan requests if

A) they are black or oriental
B) they are single females
C) they are on public assistance
D) the loan is too risky

Question 43

Prepayment of loans may be initiated by

A) borrowers and lenders
B) bank regulators
C) bank auditors
D) the SEC

Question 44

Covenants in loan agreements are used to

A) secure collateral
B) make representations in agreements
C) control the borrower's behavior
D) as guaranties

Question 45

Accrual basis in loan pricing refers to

A) the number of days used to calculate interest
B) the method of accounting used to record the loans
C) the effective yield
D) none of the above

Question 46

The effective yield on the loan is the least when the loan is priced at

A) nominal rates/365 days
B) 360-day year/30-day months
C) 360-day year/actual number of days
D) 365-days/actual number of days

Question 47

The prime rate is

A) the base rate on consumer loans
B) the base rate on international loans
C) the base rate conventional loans
D) none of the above

Question 48

The "Return on Net Funds Employed" model may be used to

A) determine the profitability of a borrower
B) determine the price of a loan
C) determine return on capital
D) none of the above

Question 49

Relationship pricing is used for

A) relatives of bank employees
B) stockholders and insider loans
C) interbank/correspondent bank loans
D) none of the above

Question 50

Performance pricing links the price of a loan to

A) the financial condition of the borrower
B) the prime rate
C) LIBOR
D) A floating rate

Question 51

Commercial loan agreements should contain which of the following:

A) means of repayment
B) representations
C) fees and charges
D) all of the above

Question 52

A credit facility is another name for:

A) a branch bank.
B) wholesale banking.
C) credit cards.
D) Loans and agreements to make loans.

Question 53

A commercial (in contrast to consumer) line of credit is an agreement between a customer and a bank that

A) may not obligate the bank to honor the customer's request for a loan
B) gives the customer the right to borrow up to a predetermined amount.
C) is renewed at the end of the contract period in an evergreen facility.
D) is usually for one year or longer.

Question 54

Revolving loans are generally used for

A) financing rolling stock.
B) financing working capital (inventories, accounts receivable, etc.)
C) financing plant expansions.
D) permanent financing.

Question 55

The outstanding amount of a term loan should always be

A) less than the value of the asset being financed
B) equal to the borrower's equity.
C) equal to the value of the collateral.
D) equal to the net present value of the cash flows from the asset being financed.

Question 56

Loans that are used to fill a gap in the time until a specific event occurs are called

A) evergreen facilities
B) bridge loans.
C) floor plans.
D) term loans

Question 57

Asset-based lending is typically used to finance

A) real estate.
B) construction and development projects.
C) accounts payable
D) accounts receivable

Question 58

Asset based lenders tend to pay more attention to __________ of an asset than banks.

A) book value
B) market value.
C) restrictive covenants.
D) overdrafts.

Question 59

Overdrafts are a result of

A) banks paying on checks or wire transfers drawn on uncollected balances.
B) loans made against certificates of deposit
C) banks paying wire transfers made during one business day
D) banks extending credit beyond the amount specified in a line of credit

Question 60

Which type of lease should be used to finance automobiles for a period of two years?

A) financial lease
B) leverage lease
C) operating lease
D) commercial lease

Question 61

Collateral does not reduce the risk of a loan per se, because

A) it is not part of the loan agreement
B) the risk of a loan is determined by the borrower's willingness and ability to repay the loan
C) it may be worth less than the bank thinks
D) the bank may not have title to the collateral

Question 62

Typical collateral for a commercial loan consists of

A) inventories
B) accounts receivable
C) equipment
D) all of the above

Question 63

A Bankers' Acceptance is most commonly used in connection with

A) financing foreign trade
B) financing inventories
C) financing securities
D) financing trust accounts

Question 64

Another name for floor planning is

A) warehouse receipt
B) trust receipt
C) banker's acceptance
D) field warehouse

Question 65

Chattel mortgages refer to

A) a security agreement using intangible property
B) a security agreement using corporate assets
C) a security agreement using tangible personal property
D) a security agreement using commercial equipment

Question 66

Small banks can participate in loans far in excess of their asset size by

A) buying financial futures contracts
B) buying participations
C) achieving economies of scope
D) by selling loans downstream

Question 67

Written loan policies should contain

A) information about insider borrowing
B) information about credit limits
C) information about loan supervision
D) all of the above

Question 68

Loan review refers to

A) the process of approving loan applications
B) the review of all of the documentation
C) the establishment of geographic limits and categories of risk before loans are granted
D) an audit of practices and procedures made after the loan has been extended.

Question 69

"Permanent assets" should be financed with

A) lines of credit
B) transaction loans
C) term loans
D) real estate loans