Question 1

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

Accepted Answer

A

Question 2

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

Accepted Answer

According to generally accepted accounting principles (GAAP), a loan is classified as non-current when payments are past due for at least 90 days, indicating that it is not likely to be collected within the next year. This ensures that financial statements accurately reflect the company's financial position and liquidity. Therefore, option C is the correct choice.

Question 3

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

Accepted Answer

C

Question 4

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

Accepted Answer

A loan policy formalizes a bank's lending guidelines and sets out the conditions under which loans may be granted. It outlines the bank's lending objectives, credit criteria, risk management practices, and loan pricing policies.

Question 5

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.

Accepted Answer

Widespread use of credit scoring standardizes the perceived quality of different loan types, making it easier for lenders to assess risk and set interest rates accordingly.

Answer: D 
 Credit scoring can reduce the costs of associated loans by allowing lenders to make more informed lending decisions and potentially offer lower interest rates to borrowers with higher credit scores.

Options B and C are not correct as they both suggest negative effects of credit scoring, whereas credit scoring is generally seen as a positive development in lending practices.

Question 6

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.

Accepted Answer

Credit card banks typically have high ROA (Return on Assets) rates because of their high interest rates and fees. However, they also have high charge-off rates because credit card debt is unsecured and therefore riskier than other types of loans. Agricultural banks, commercial lenders, and international banks typically have lower charge-off rates due to the nature of their lending portfolios. Consumer lenders may have a higher charge-off rate than agricultural or commercial lenders, but they generally have lower ROA rates than credit card banks.

Question 7

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.

Accepted Answer

A security interest in a loan is considered perfected when the bank holds the collateral as a means of ensuring that the loan will be repaid. This provides the lender with a legal claim on the property or assets that were put up as collateral in case the borrower defaults on their loan payments.

Question 8

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.

Accepted Answer

Credit Review involves assessing and verifying the loan documentation to ensure compliance and accuracy.

Question 9

Which of the following is not one of the five Cs of bad credit? A) Complacency B) Contention C) Contingencies D) Competition E) Carelessness

Accepted Answer

Contention is not typically listed as one of the five Cs of bad credit, which usually include Complacency, Carelessness, Contingencies, Competition, and Communication.

Question 10

The ability to repay a loan is measured by a firm's:
A) capacity.
B) collateral.
C) character.
D) capital.
E) credit.

Accepted Answer

The ability to repay a loan is best measured by a firm's capacity, which refers to the ability of the borrower to generate sufficient cash flows to meet the loan repayments. This is determined by analyzing the firm's income statement, cash flow statement, and balance sheet. Collateral refers to the assets that the borrower pledges as security for the loan, character refers to the borrower's honesty and integrity, capital refers to the borrower's equity or net worth, and credit refers to the borrower's credit score and credit history. While these factors may also be considered in assessing a borrower's ability to repay a loan, capacity is the most directly relevant measure.

Question 11

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

Accepted Answer

Large firms have multiple options for obtaining funds, including equity financing (issuing stock), issuing commercial paper (short-term debt securities), issuing long-term bonds, and obtaining loans from commercial banks. Large firms often use a combination of these financing options to meet their funding needs.

Question 12

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.

Accepted Answer

According to FDIC (Federal Deposit Insurance Corporation), as of March 31, 2021, 84.6% of the FDIC-insured institutions are classified as commercial lenders, which include community banks, regional and large banks, and other non-commercial lenders. Therefore, the best choice is D.

Question 13

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

Accepted Answer

Officer call programs are performed by Business Development officers to solicit new loan applications and Credit Analysis officers to assess the creditworthiness of potential borrowers. Loan committee reviews, loan documentation review, perfect security interest, and process loan payments are all activities that fall under the Credit Administration function.

Question 14

The lender's secondary source of repayment in case of default is:
A) capacity.
B) collateral.
C) character.
D) capital.
E) credit.

Accepted Answer

Collateral is the secondary source of repayment in case of default. It refers to assets pledged as security for the loan. If the borrower defaults, the lender can seize the collateral to recover their losses.

(Note: Choice A, C, D, and E refer to the borrower's creditworthiness and ability to repay the loan, which are primary sources of repayment and not secondary sources in case of default.)

Question 15

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

Accepted Answer

Credit culture refers to the principles and values that guide a bank's lending activities, influencing how loans are evaluated, approved, and managed.

Question 16

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

Accepted Answer

The primary emphasis of a values-driven credit culture is on bank soundness and stability, which means managing risks carefully, maintaining integrity, and adhering to ethical standards. Annual profit, loan volume, and loan growth are important but not the primary focus. Short-term earnings may compromise the long-term health and reputation of the bank, which contradicts values-driven culture.

Question 17

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.

Accepted Answer

According to data from the Federal Deposit Insurance Corporation (FDIC), as of June 2021, real estate loans make up the largest single loan category for all banks in the United States. This includes loans for both commercial and residential properties.

Question 18

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.

Accepted Answer

When a bank lends in a narrow geographic area, they are subject to concentrated risk. This means that the bank is more vulnerable to economic downturns or industry-specific events in that particular area, increasing the risk of default on the loans.

Question 19

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

Accepted Answer

Country risk refers to 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. It can arise due to factors like economic instability, political instability, or changes in government policies. This risk can be mitigated by conducting thorough risk assessments and due diligence before granting loans to borrowers in a particular country.

Question 20

Which of the following is not one of the five Cs of (good) credit? A) Character B) Collateral C) Capital D) Capacity. E) Communication

Accepted Answer

The five Cs of credit are Character, Capacity, Capital, Collateral, and Conditions. Communication is not one of them.

Quiz 13: Overview of Credit Policy and Loan Characteristics

In the credit process, which of the following activities falls under Credit Execution and Administration?

To be classified as a non-current loan, payments must be past due a minimum of how many days?

Which of the following refers to a lender's tendency to ignore circumstances in which a loan might default?

Which of the following formalizes a bank's lending guidelines?

Widespread use of credit scoring:

The highest ROA and charge-off rates in 2012 were reported by:

A security interest in a loan is said to be perfected if the:

In the credit process, which of the following activities falls under Credit Review?

Which of the following is not one of the five Cs of bad credit?

The ability to repay a loan is measured by a firm's:

Large firms can obtain funds from which of the following?

The vast majority of FDIC-insured institutions are classified as:

In the credit process, which of the following activities falls under Business Development and Credit Analysis?

The lender's secondary source of repayment in case of default is:

Which of the following refers to the principles that drive a bank's lending activity?

Which of the following is the primary emphasis of a values-driven credit culture?

The largest single loan category for all banks is:

When a bank lends in a narrow geographic area, they are subject to:

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?

Which of the following is not one of the five Cs of (good) credit?