Question 1

A short-term, unsecured borrowing that is backed by the issuer's credit strength is...
A)Bankers Acceptance
B)Commercial Paper
C)Repurchase Agreement
D)Federal Funds
E)Eurodollars

Accepted Answer

Commercial Paper is a short-term, unsecured borrowing that is commonly used by corporations to fund their short-term debt obligations. It is backed by the issuer's credit strength rather than any collateral. The maturity of commercial paper typically ranges from a few days to 270 days. Banks, money market funds, and other institutional investors are typical buyers of commercial paper.

Question 2

The following is are NOT characteristics of a mortgage loan:
A)the loan is usually illiquid
B)the loan's maturity date is certain
C)the loan is normally secured by the borrower's property
D)the interest rate can be fixed or variable
E)all of the above

Accepted Answer

The maturity date of a mortgage loan is not certain, as it can be extended or refinanced.

Question 3

Which of the following statements is are false?
A)Term loans require a repayment that is normally amortized.
B)Term loans have longer maturity as they are used to buy fixed assets that require large outlays.
C)The repayment comes from the cash flows generated by the assets financed by the term loans.
D)Term loans are not normally drawn under lines of credit.
E)All of the above.

Accepted Answer

Term loans are normally drawn under lines of credit.

Question 4

Which of the following statements is are false?
A)A transaction loan is negotiated for a specific purpose.
B)A transaction loan is usually done frequently.
C)A transaction loan is normally secured by an asset.
D)The repayment comes from the use of the asset pledged as collateral
E)All of the above

Accepted Answer

A transaction loan is negotiated for a specific purpose, and it is normally secured by an asset. The repayment comes from the use of the asset pledged as collateral. However, it is not usually done frequently, as it is intended for a specific transaction or purpose. Therefore, statement B is false.

Question 5

The "conditions precedent" in a loan agreement means
A)that a borrower must repay the loan before the due date
B)that a borrower must satisfy certain requirements before the loan is funded
C)that a bank can waive certain loan stipulations when the borrower has not defaulted
D)both a and b
E)both a and c

Accepted Answer

"Conditions precedent" refers to the conditions that must be met before the loan is funded. This includes requirements such as providing collateral, obtaining insurance, or meeting certain financial ratios. It does not refer to the repayment of the loan or the ability of the bank to waive certain stipulations.

Question 6

Which of the following statements is are false?
A)A working capital loan is used by firms to finance day-to-day operations.
B)A working capital loan is usually unsecured.
C)A working capital loan is usually used to buy current assets or repay debts incurred in purchasing current assets.
D)All of the above.
E)None of the above.

Accepted Answer

Working capital loans are often secured, not usually unsecured, as they may require collateral to mitigate the lender's risk.

Question 7

When a bank originates a loan, it
A)initiates a contact with a borrower
B)conducts a credit analysis to determine the borrower's creditworthiness
C)designs the loan contract
D)collects the payments
E)a, b, and c only

Accepted Answer

When a bank originates a loan, it initiates a contact with a borrower, conducts a credit analysis to determine the borrower's creditworthiness, and designs the loan contract. However, collecting payments is typically done by a separate department within the bank or outsourced to a third-party servicer.

Question 8

Representations in a loan agreement usually contain
A)borrower's legal status
B)the opinions of the borrower's counsel
C)borrower's collateral
D)all of the above
E)a and c only

Accepted Answer

Representations in a loan agreement usually contain borrower's legal status and borrower's collateral. The opinions of the borrower's counsel may be included but are not typically considered a representation. Therefore, the best choice is E (a and c only).

Question 9

Bankers Acceptances are used in international trade mainly because...
A)they are a cheap source of financing
B)they always pay in local currency so there is no currency risk
C)they help solve informational asymmetry problem between the trading parties
D)they allow banks to earn a high profit
E)they are long-term borrowings

Accepted Answer

Bankers Acceptances help solve the informational asymmetry problem between the trading parties. They provide a secure and standardized way for exporters to ensure they will be paid and give importers a guarantee that the goods they are paying for will be received. This helps to build trust and increases confidence in international trade transactions. Bankers Acceptances are not necessarily a cheap source of financing, they do not always pay in local currency, they may not allow banks to earn a high profit, and they are not long-term borrowings.

Question 10

A loan commitment is
A)a promise by the borrower to obtain a loan from a particular bank of his choice
B)a promise by the bank to lend in the future on a prespecified term.
C)an agreement that entitles the bank to change the interest rate on loan based on the prevailing market condition
D)the same as spot lending
E)all of the above

Accepted Answer

A loan commitment is a promise by the bank to lend in the future on a prespecified term. It is not a promise by the borrower to obtain a loan from a particular bank of his choice, nor does it give the bank the right to change the interest rate on the loan based on prevailing market conditions. Spot lending refers to the immediate provision of a loan, without any prior commitments or agreements.

Question 11

In analyzing a loan application, a borrower's financial capability refers to...
A)capital
B)capacity
C)character
D)collateral
E)Conditions

Accepted Answer

A borrower's financial capability refers to their capacity or ability to repay the loan. This includes factors such as income, expenses, and debt-to-income ratio.

Question 12

Credit card borrowings
A)are usually done on a short-term basis
B)are secured by the cardholders' assets
C)have a credit limit
D)all of the above
E)both a and c

Accepted Answer

Credit card borrowings are usually done on a short-term basis and have a credit limit. They are not secured by the cardholders' assets. Therefore, option A and C are correct, while option B is incorrect. Therefore, the best choice is E, which includes options A and C.

Question 13

The main reasons) for the declining importance of the commercial and industrial loans relative to mortgage loans is
A)the competition from the venture capitalists
B)the S&L crisis which resulted in the reduction of mortgage lending of the remaining S&Ls
C)the bank's competitive advantage in solving private information problem has diminished
D)both a and b
E)all of the above

Accepted Answer

The answer of The main reasons) for the declining importance...

Question 14

Moral hazard problem associated with bank lending stems from
A)the borrower's private attributes which are unknown to the bank at the time of the loan application
B)the bank's inability to screen the borrower to determine its creditworthiness
C)the borrower's desire to take on riskier projects after obtaining the loan
D)all of the above
E)b and c only

Accepted Answer

Moral hazard in bank lending arises when borrowers, after receiving a loan, engage in riskier behavior than the bank anticipated, potentially jeopardizing repayment.

Question 15

A loan covenant stipulates
A)that a borrower has filed all necessary tax returns before applying for a loan
B)certain minimum standards that a borrower must maintain to avoid a state of default
C)that a borrower must have a cosigner
D)all of the above
E)a and b only

Accepted Answer

A loan covenant is a condition in a loan agreement that requires the borrower to meet certain financial performance standards to avoid default.

Question 16

In credit card lending, the bank makes profits from
A)the discount at which the sales slips are sold to the merchants
B)the interest rate charged to the credit cardholders with outstanding balances
C)the annual fees that may be charged by the banks
D)all of the above
E)both b and c

Accepted Answer

Banks make profits from the interest charged on outstanding balances and from annual fees charged to cardholders.

Question 17

Risk processing involves
A)pre-lending screening
B)post-lending monitoring
C)loan workouts to control credit risk
D)all of the above
E)b and c only

Accepted Answer

The answer of Risk processing involves
A)pre-lending screening
B)post-lending monitoring
C)loan workouts to...

Question 18

A bank loan acquired through a spot market purchase has the following characteristics:
A)the bank originates and then funds the loan
B)the bank promises to lend to a borrower on a prespecified terms in the future
C)the bank buys the loan from an intermediary that originated it
D)all of the above
E)a and c only

Accepted Answer

A spot market purchase involves the bank buying a loan that was originated by an intermediary. Therefore, choice C is correct. Choice A is not applicable as the bank is not originating the loan in this case. Choice B is also not applicable as the loan has already been originated and the bank is buying it in the spot market, not promising to lend in the future.

Question 19

An important difference between loans and debt securities is
A)loans are tradable, debt securities are not
B)loans are not tradable, debt securities are
C)loans are usually issued by banks, debt securities are not
D)loans are usually less liquid than debt securities
E)all of the above

Accepted Answer

Loans are usually less liquid than debt securities because they are not as easily traded.

Question 20

Bankers Acceptances
A)are financial instruments that arise to facilitate mostly international trade.
B)require a payment at face value at the maturity date.
C)are not tradable.
D)all of the above.
E)a and b only.

Accepted Answer

Bankers Acceptances are financial instruments that are commonly used to facilitate international trade. They are typically payable at face value at the maturity date, and can be traded in the secondary market. So, the correct options are A and B. Option C is incorrect, as Bankers Acceptances can indeed be traded. Therefore, the best choice is E, as it denotes the correct options.

Quiz 7: Spot Lending and Credit Risk

A short-term, unsecured borrowing that is backed by the issuer's credit strength is...

The following is are NOT characteristics of a mortgage loan:

Which of the following statements is are false?

Which of the following statements is are false?

The "conditions precedent" in a loan agreement means

Which of the following statements is are false?

When a bank originates a loan, it

Representations in a loan agreement usually contain

Bankers Acceptances are used in international trade mainly because...

A loan commitment is

In analyzing a loan application, a borrower's financial capability refers to...

Credit card borrowings

The main reasons) for the declining importance of the commercial and industrial loans relative to mortgage loans is

Moral hazard problem associated with bank lending stems from

A loan covenant stipulates

In credit card lending, the bank makes profits from

Risk processing involves

A bank loan acquired through a spot market purchase has the following characteristics:

An important difference between loans and debt securities is

Bankers Acceptances