Q&A Hero

Q: Shorter-term cash loans to consumers are normally secured, but longer-term consumer loans are usually unsecured.

Q: Competition for consumer loans tends to drive the interest rates on these loans down closer to loan production costs.

Q: The Community Reinvestment Act is designed to prevent a lender from arbitrarily marking out certain neighborhoods as undesirable and refusing to lend to people who live in those neighborhoods.

Q: Real estate loans are smaller in size and shorter in maturity than most other types of bank loans.

Q: The burden of proof is on a bank to demonstrate that its credit scoring system successfully identifies quality loan applications at a statistically significant level.

Q: The Equal Credit Opportunity Act authorizes individuals and families to review their credit file for accuracy and to demand an investigation and correction of any apparent inaccuracies.

Q: An installment loan is one where the customer repays the loan in two or more consecutive payments. These payments are often made monthly or quarterly.

Q: Under FNMA rules for buying home mortgages, FNMA does not purchase a borrower's mortgage if the borrower's credit report is more than 45 days old.

Q: FNMA purchases home mortgages only if the borrower's monthly house payment does not exceed 35 percent of his monthly gross income.

Q: The board of directors and senior management of the banks that are awarded top CRA ratings are often committed to promote community involvement.

Q: The symbol "SN" assigned as a rating indicates that a bank has been judged to be an outstanding performer under the terms of the Community Reinvestment Act.

Q: Customers who apply for credit have the right to receive a written notice along with the reasons for denial if their loan request is turned down by a bank.

Q: The Truth-in-Lending Act of 1968 gave consumers the right to access the information from their credit files kept at local and regional credit bureaus.

Q: Credit-scoring systems tend to be valid over long periods of time (usually several years) and need not be periodically retested.

Q: "Pyramiding of debt" refers to borrowing from one lender to repay another lender.

Q: The "right of offset" allows a bank to auction a customer's property to the highest bidder to recover a loan in default.

Q: Lenders in the consumer loan field prefer to measure a borrowing customer's income by the amount of take-home pay.

Q: Households tend to be interest-inelastic borrowers.

Q: Consumer loans appear to have virtually no sensitivity to the business cycle, staying relatively stable through both recessions and expansions.

Q: Credit cards offer convenience to customers plus a revolving line of credit.

Q: Nonresidential consumer loans include credit to finance the purchase of home appliances.

Q: Finance companies are the most dominant lenders of credit to households in the United States with commercial banks ranked second as consumer lenders.

Q: One new type of mortgage where no principal payments are made for an initial period is called a(n) _______________.

Q: Which of following contingent liabilities may be required to be recorded on a balance sheet and not to be hidden as a footnote? A. Environmental liabilities B. Limiting regulations C. Unfunded pension liabilities D. Litigation or pending lawsuits against firms E. Underfunded pension liabilities

Q: Which of the following is an important asset-based balance sheet composition ratio? A. Notes payable/Total liabilities and net worth B. Gross profit/Sales C. Net operating profit/Total assets D. Inventories/Total assets E. Net income after taxes/Total assets

Q: A project loan granted on its own merits and which does not have a sponsor to guarantee the loan is known as a project loan granted on: A. recourse basis. B. resort basis. C. nonrecourse basis. D. sponsorship basis. E. leverage basis.

Q: The increasingly popular type of financing, in which merchants receive cash advances and pay them off from their credit card sales, is called: A. asset-based financing. B. retailer credit financing. C. operating capital credit financing. D. credit card receivables financing. E. revolving credit financing.

Q: A blind spot' may be built into the repayment schedule of a term loan wherein: A. no installment will be due because of prepayment. B. no installment will be due because of timely payment of the loan. C. no installment will be due because of shortage of cash with the borrower. D. installment will be collected before they are due. E. no installment will be collected because of loan foreclosure.

Q: For which of the following types of short-term loans, the lender has to incur the expense of collecting accounts receivable and risk of the loan? A. Factoring B. Retailer and equipment financing C. Syndicated loans D. Term business loans E. Revolving credit financing

Q: Which of the following short-term loans are traded in the secondary market and usually carry an interest rate based upon the London Interbank Offered Rate (LIBOR) on Eurocurrency deposits? A. Asset-based financing B. Retailer and equipment financing C. Syndicated loans D. Term business loans E. Revolving credit financing

Q: A bank has a listed prime rate of 7 percent. They have estimated that the marginal cost of raising funds is 5 percent, their default risk premium on a loan is 1.5 percent and that they want a profit margin of 2 percent. They have also estimated that the term risk premium is 0.5 percent. What is the interest rate this bank will charge if they use the price leadership model (and the prime rate is their base rate)? A. 8.5 percent B. 9 percent C. 12 percent D. 9.5 percent E. None of the options is correct.

Q: A bank wants to estimate a firm's future financial condition. Which of the following is something that allows a bank to do this? A. Statement of cash flows B. Pro forma statement C. Balance sheet D. Income statement E. None of the options is correct.

Q: A firm has net sales of $25,000, costs of goods sold of $10,000, selling, general and administrative expenses of $8,000 (of which $2,000 are depreciation expenses), and taxes (in cash) of $3,000. What is this firm's operating cash flow (using the traditional or direct method)? A. $4,000 B. $15,000 C. $6,000 D. $8,000 E. None of the options is correct.

Q: Banks need to be able to compare the firm they are examining to their industry. One company that provides information to banks about the industries their customers are in is: A. Standard and Poors B. Moody's C. Dun and Bradstreet D. Morgan Stanley E. None of the options is correct.

Q: A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2,500 in accounts receivables, $1,000 in inventory, $5,000 in plant and equipment and that their assets totaled $9,000. In addition this bank discovered that the firm had $2,000 in current liabilities, $2,500 in long-term debt, and $4,500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales and $2,000 in net income. What is this firm's acid test ratio? A. 1.00 B. 2.00 C. 0.33 D. 3.00 E. 1.50

Q: A bank wants to examine the financial success of a company by examining the profits of a company. What ratio will help the bank examine this issue? A. Selling and administrative expenses/Net sales B. Net sales/Total assets C. Current assets - Current liabilities D. Net income/Total assets E. Long term debt/(Long term debt + Net worth)

Q: A bank is concerned because they feel that a firm will not be able to raise enough cash to pay bills that are due within the next year. What ratio are they most likely to examine to address this concern? A. Selling and administrative expenses/Net sales B. Net sales/Total assets C. Current assets - Current liabilities D. Net income/Total assets E. Long-term debt/(Long-term debt + Net worth)

Q: A bank feels that a firm has expenses that are too high. What ratio are they most likely to examine to address this concern? A. Selling and administrative expenses/Net sales B. Net sales/Total assets C. Current assets - Current liabilities D. Net income/Total assets E. Long-term debt/(Long-term debt + Net worth)

Q: A bank has a concern because they feel that a firm has an excessive amount of assets. They do not feel that the firm is efficient in generating sales from their current level of assets. What ratio are they most likely to examine to answer this question? A. Selling and administrative expenses/Net sales B. Net sales/Total assets C. Current assets - Current liabilities D. Net income/Total assets E. Long-term debt/(Long-term debt + Net worth)

Q: A bank has a concern about the Wilson Company's debt level. They feel that it is too high. What ratio are they most likely to examine to answer this question? A. Selling and administrative expenses/Net sales B. Net sales/Total assets C. Current assets - Current liabilities D. Net income/Total assets E. Long-term debt/(Long-term debt + Net worth)

Q: A bank wants to know whether a customer can raise cash in a timely fashion at a reasonable cost. They are most likely to look at which of the following ratios? A. Wages and salaries/Net sales B. Accounts receivables/(Annual credit sales/360) C. Net income after taxes/Net sales D. Income before interest and taxes/Interest payments E. (Current assets - Inventory)/Current liabilities

Q: A bank wants to examine the adequacy of a business customer's earnings based on the coverage ratios. They are most likely to look at which of the following ratios? A. Wages and salaries/Net sales B. Accounts receivables/(Annual credit sales/360) C. Net income after taxes/Net sales D. Income before interest and taxes/Interest payments E. (Current assets - Inventory)/Current liabilities

Q: A bank wants to examine how well a customer markets their goods and services. They are most likely to look at which of the following ratios? A. Wages and salaries/Net sales B. Accounts receivables/(Annual credit sales/360) C. Net income after taxes/Net sales D. Income before interest and taxes/Interest payments E. (Current assets - Inventory)/Current liabilities

Q: A bank wants to examine how well a customer uses assets to generate sales. They are most likely to look at which of the following ratios? A. Wages and salaries/Net sales B. Accounts receivable/(Annual credit sales/360) C. Net income after taxes/Net sales D. Income before interest and taxes/Interest payments E. (Current assets - Inventory)/Current liabilities

Q: A bank wants to examine how well a customer controls their expenses. They are most likely to look at which of the following ratios? A. Wages and salaries/Net sales B. Accounts receivables/(Annual credit sales/360) C. Net income after taxes/Net sales D. Income before interest and taxes/Interest payments E. (Current assets - Inventory)/Current liabilities

Q: The management of the Frickel Frontier Freight Company wants to make the company private by borrowing money and using the proceeds of the loan to purchase the shares of the company in the market. Management believes they can increase revenues enough to be able to pay off the loan. What type of loan is management getting? A. Term business loan B. Revolving credit financing C. Long-term project loan D. Leveraged buyout E. Syndicated loan

Q: The Jung Company and the Nguyen Company have combined to build a new container ship docking facility in Charleston Harbor. The facility is expected to take two years to complete and cost $3 billion to construct. These companies want to borrow money in order to build this facility. What type of loan is this most likely to be? A. Term business loan B. Revolving credit financing C. Long-term project loan D. Leveraged buyout E. Syndicated loan

Q: The Wabash Washing Machine Company has arranged to get a loan from their bank over the next five years. They can borrow up to a pre-specified limit and repay it as many times as they need until the loan matures. The Wabash Washing Machine Company has not pledged any specific collateral for this loan. What type of loan is this most likely to be? A. Term business loan B. Revolving credit financing C. Long-term project loan D. Leveraged buyout E. Syndicated loan

Q: Ford Motor Company needs to borrow $50 million. The First National Bank creates a packaged loan with several other banks to lend to Ford Motor Company. This loan package can be sold on the secondary market and carries a rate that is 400 basis points above LIBOR. The First National Bank expects this loan package to ultimately be held by a finance company looking for a good return on their money? What type of loan is this most likely to be? A. Term business loan B. Revolving credit financing C. Long-term project loan D. Leveraged buyout E. Syndicated loan

Q: Mary Williams needs to purchase a new bulldozer and excavator for her construction business and wants to repay the loan over the next three years in regularly scheduled payments. What type of loan does Mary need? A. Term business loan B. Revolving credit financing C. Long-term project loan D. Leveraged buyout E. Syndicated loan

Q: Sight n' Sound is a retail store that sells refrigerators, washers, dryers, and other consumer appliances. They need a loan so that they can place an order with Whirlpool. The appliances will be the collateral for the loan and as an appliance is sold, the money will be passed on to the lender. An employee of the lender will periodically check to make sure what has sold and what remains in the store. What type of loan does Sight n' Sound need? A. Self-liquidating inventory loan B. Working capital loan C. Interim construction financing D. Security dealer financing E. Retailer and equipment financing

Q: Barbara Miller is a small dealer who specializes in healthcare stocks. She needs a loan so that she can sustain her portfolio of stocks until customer-buy orders catch up with what she has already purchased from the market. She only expects to need this loan for a week. What type of loan does Barbara need? A. Self-liquidating inventory loan B. Working capital loan C. Interim construction financing D. Security dealer financing E. Retailer and equipment financing

Q: Randal Ice needs a loan to purchase pet food and other pet supplies for his local pet store over the next six months. He has estimated that the maximum amount of inventory he will need in the next six months is $200,000 and he knows that he will have to use accounts receivables and the inventory he purchases as collateral for the loan. At the end of six months, he hopes he can get the loan renewed. What type of loan does Randal need? A. Self-liquidating inventory loan B. Working capital loan C. Interim construction financing D. Security dealer financing E. Retailer and equipment financing

Q: Dick Dowen needs a loan to buy plants and fertilizer for his nursery for the spring planting season. This loan will automatically be paid off as the plants and fertilizer are sold to his customers. What type of loan does Dick need? A. Self-liquidating inventory loan B. Asset-based financing C. Interim construction financing D. Security dealer financing E. Retailer and equipment financing

Q: Lloyd Blenman is building a shopping center in Charlotte and needs to get a loan until the shopping center is constructed and he can get a mortgage on the property. What type of loan does he need? A. Self-liquidating inventory loan B. Working capital loan C. Interim construction financing D. Security dealer financing E. Retailer and equipment financing

Q: The most common type of loans foreign banks make in the U.S. are: A. commercial loans. B. retail loans. C. real estate loans. D. credit card loans. E. None of the options is correct.

Q: Small business lending by banks, in proportion of all loans is: A. declining. B. rising. C. relatively constant. D. one with no pattern. E. one with an unknown pattern.

Q: SNCs are also known as: A. working capital loans. B. asset-backed loans. C. syndicated loans. D. construction loans. E. inventory loans.

Q: Hager Smith, a customer of Standard Bank, maintains an average balance of $420,000. The float from uncollected funds from his balance, accounts for $21,000. The applicable legal reserve requirement at this checking account is 10 percent. Determine Smith's net usable funds. A. $359,100 B. $396,900 C. $378,000 D. $399,000 E. $438,900

Q: A bank has determined the information below for one of its customers. This customer wants to borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000. What is the expected net rate of return on this loan? A. 10.00 percentB. 8.20 percentC. 10.25 percentD. 13.75 percentE. None of the options is correct.

Q: A bank has a prime rate of 6 percent for its best customers. It has determined that the default risk premium for a particular customer is 0.4 percent and the term-risk premium for this loan is 0.25 percent. If this customer wants to borrow $5.0 million from the bank, how much in interest will this customer pay in one year? A. $332,500 B. $665,000 C. $300,000 D. $320,000 E. None of the options is correct.

Q: A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds costs to the bank are 0.5 percent. It has also determined that its margin to compensate the bank for default risk for a particular customer is .30 percent. It has also determined that it wants to have a profit margin of .3 percent. What business loan model is this bank using to price the loan for this customer? A. The cost-plus loan pricing method B. The price leadership model C. The below-prime rate pricing model D. Customer profitability analysis E. None of the options is correct.

Q: The business loan pricing method which starts with a base rate such as a bank's prime rate and adds a markup for default and term risk is known as: A. the cost-plus loan pricing method. B. the price leadership model. C. the below-prime rate pricing model. D. customer profitability analysis. E. None of the options is correct.

Q: Which of the following is a strength of the customer profitability analysis method for pricing loans? A. It considers the competition from other lenders. B. It allows the bank to compete more aggressively with the commercial paper market. C. It considers the cost of loanable funds and the operating costs of running the bank. D. It takes the whole customer relationship into account. E. None of the options is correct.

Q: Which of the following is a strength of the price leadership loan pricing method? A. It considers the competition from other lenders. B. It allows the bank to compete more aggressively with the commercial paper market. C. It considers the cost of loanable funds and the operating costs of running the bank. D. It takes the whole customer relationship into account. E. None of the options is correct.

Q: Which of the following is true of the cost-plus loan pricing method? A. It takes the whole customer relationship into account. B. It gives much regard for the competition from other lenders. C. It assumes the bank's costs in order to make correctly priced loans. D. It takes into consideration the prime rate to correctly price a loan. E. All of the options are correct.

Q: Which of the following is a strength of the markup (or below-prime market) loan pricing method? A. It considers the competition from other lenders. B. It allows the bank to compete more aggressively with the commercial paper market. C. It considers the cost of loanable funds and the operating costs of running the bank. D. It takes the whole customer relationship into account. E. None of the options is correct.

Q: Which of the following is true of the price leadership loan pricing method? A. It does not consider the marginal cost of raising funds. B. It does not give much regard for the competition from other lenders. C. The bank must know what their costs are in order to make correctly priced loans. D. The bank must consider the revenues and expenses from all of the bank's dealings with the customer. E. None of the options is correct.

Q: The business loan pricing method that bases a loan rate on a relatively low money market interest rate (such as the Federal funds rate) plus a small margin to cover risk exposure and a profit margin is known as the: A. price leadership model. B. below-prime pricing model. C. cost-plus loan pricing method. D. customer profitability analysis. E. None of the options is correct.

Q: The method of pricing a business loan that contends that a bank should take the whole customer relationship into account when pricing each loan request is the: A. cost-plus loan pricing method. B. price leadership model. C. below-prime rate pricing model. D. customer profitability analysis. E. None of the options is correct.

Q: Suppose a business borrower is quoted a loan rate of two percentage points above the prevailing prime interest rate posted by leading U.S. banks. This is an example of the: A. times-prime pricing method. B. market-based pricing method. C. cost-plus loan pricing method. D. prime-plus pricing method. E. customer profitability analysis.

Q: The business loan pricing method that estimates the before-tax yield expected from the loan by considering the all revenues and expenses associated with a particular borrower and the net amount of loanable funds that the bank must turn over to the borrower, is called the: A. the cost-plus loan pricing method. B. the price leadership model. C. the below-prime market pricing model. D. customer profitability analysis. E. None of the options is correct.

Q: The business loan pricing method that includes the nonfunds operating costs of making a loan and the bank's desired profit margin as some of its factors in pricing a loan, is called: A. the cost-plus loan pricing method. B. the price leadership model. C. the markup model. D. customer profitability analysis. E. None of the options is correct.

Q: According to the cost-plus model for pricing loans, the factors that should be considered in pricing a loan include: A. the marginal cost of raising loanable funds to support the loan request. B. the lender's nonfunds operating costs. C. an appropriate margin to compensate the bank for default risk. D. the bank's desired profit margin. E. All of the options are required as factors to price a loan.

Q: Which dimension of a business firm's financial and operating performance would the gross profit margin fit best? A. Liquidity measure B. Market indicator C. Contingent liability D. Marketability of the product or service E. None of the options is correct.

Q: Which dimension of a business firm's financial and operating performance, would unfunded pension liabilities fit best? A. Profitability measure B. Market indicator C. Contingent liability D. Marketability of the product or service E. None of the options is correct.

Q: A bank that is examining the ratio of overhead expenses to net sales, is examining which category of ratios? A. Expense control measures B. Operating efficiency measures C. Coverage measures D. Liquidity measures E. Leverage measures

Q: A bank that is examining the ratio of annual costs of goods sold to average inventory, is examining which category of ratios? A. Expense control measures B. Operating efficiency measures C. Coverage measures D. Liquidity measures E. Leverage measures

Q: A bank that is examining the ratio of total liabilities to total assets, is examining which category of ratios? A. Expense control measures B. Operating efficiency measures C. Coverage measures D. Liquidity measures E. Leverage measures

Q: A loan or line of credit extended to a business by a group of lending institutions in order to reduce the risk exposure is known as: A. an LBO. B. a revolving line of credit. C. a working capital loan. D. a syndicated loan. E. None of the options is correct.