Q&A Hero

Q: The ______________ is a uniform rating system developed by regulators where banks are given a rating between one and five in each of the six categories and an overall rating.

Q: A written document in which a lender promises to make credit available to a borrower, over a designated future period, up to a maximum amount in return for a commitment fee is known as a(n): A. negative covenant. B. loan guarantee agreement. C. loan policy agreement. D. loan commitment agreement. E. affirmative covenant.

Q: A good collateral for the purpose of protecting a lender should be: A. durable. B. easy to identify. C. marketable. D. stable in value. E. All the options are qualities of a good collateral.

Q: Typically, loan examiners place adversely classified loans into three categories. Loans in which the margin of protection is inadequate due to weaknesses in collateral or in the borrower's repayment abilities are categorized as: A. substandard loans. B. loss loans. C. doubtful loans. D. unproductive loans. E. bad loans.

Q: Disclosure laws require that a borrower be quoted the "true cost" of a loan, as reflected in the: A. internal rate of return (IRR). B. annual percentage rate (APR). C. net present value (NPV). D. flat rate of interest. E. interest rate on reducing balance.

Q: Timothy Gartner, an employee in the Bank of Trust and Faith, has requested for a loan of $200,000 to buy a private cruise. The bank has an unimpaired capital and surplus of $38 million and $75 million in total time and savings deposits. Average revenue for the bank in the last three years is $18.5 million and a net interest income of $5.2 million. What is the maximum amount of loan the bank can grant to Timothy? A. $950,000 B. $200,000 C. $25,000 D. $100,000 E. The bank cannot make loans to its own employees

Q: Standard Side Bank, a U.S. national bank, has $50 million in unimpaired capital and surpluses and $86 million in total time and savings deposits. Average revenue for the bank in the last three years is $12.5 million and a net interest income of $3.2 million. Pluto Inc. has applied for a loan of $9 million to the bank against which it is willing to provide $1 million worth of ten-year treasury securities. What is the maximum amount of loan the bank can make to Pluto? A. $9 million B. $4.5 million C. $7.5 million D. $8.5 million E. $1 million

Q: Standard Bank, a U.S. national bank, has $50 million in unimpaired capital and surpluses and $86 million in total time and savings deposits. Average revenue for the bank in the last three years is $12.5 million and a net interest income of $3.2 million. Pluto Inc. has applied for an unsecured loan of $9 million to the bank. What is the maximum amount of loan the bank can make to Pluto? A. $9 million B. $4.5 million C. $7.5 million D. $0.9 million E. The bank cannot make unsecured loans

Q: Royal Bank of New York, a U.S. national bank, has $25 million in capital and surpluses and $42 million in total time and savings deposits. Average revenue for the bank in the last three years is $8.5 million and a net interest income of $2.1 million. What is the maximum volume of real estate loans that the bank can make? A. $25 million B. $29.4 million C. $8.5 million D. $25.5 million E. $2.1 million

Q: Net yield for a bank is calculated as: A. total revenues received/total loan volume. B. fee income/total value of services rendered C. total revenues received/total capital. D. (total revenues received - expenses and losses)/total loan volume. E. (total revenues received - expenses and losses)/total capital.

Q: A depository institution's _________________ normally determines its legal lending limit to a single borrower. A. volume of capital B. number of customers C. number of employees D. number of offices E. profitability

Q: The Tate Manufacturing Company has $150 million in sales revenue with $90 million in cost of goods sold. It has selling and administrative expenses of $10, pays annual taxes in the amount of $10 and has depreciation and other non-cash expenses of $30 million. What are this firm's annual projected cash flows? A. $150 million B. $60 million C. $70 million D. $40 million E. None of the options is correct

Q: Jerry LeGere, a loan officer with First National Bank, checks to see if the house pledged to back up a home mortgage has a clear title and proper insurance. What step in the lending process is Jerry performing? A. Finding prospective customers B. Evaluating a customer's character and sincerity C. Making a site visit and evaluating a customer's credit history D. Evaluating a prospective customer's financial condition E. Assessing possible collateral and signing the loan agreement

Q: Terry May, a loan officer with First National Bank, calculates liquidity and debt ratios for the Lava Lamp Company and also examines their cash flow statement. What step in the lending process is Terry performing? A. Finding prospective customers B. Evaluating a customer's character and sincerity C. Making a site visit and evaluating a customer's credit history D. Evaluating a prospective customer's financial condition E. Assessing possible collateral and signing the loan agreement

Q: Jessica Simpson, a loan officer with First National Bank, visits the Tate Manufacturing Company and talks to other lenders to see their experience with Tate Manufacturing. What step in the lending process is Jessica performing? A. Finding prospective customers B. Evaluating a customer's character and sincerity C. Making a site visit and evaluating a customer's credit history D. Evaluating a prospective customer's financial condition E. Assessing possible collateral and signing the loan agreement

Q: Shelby Mann is a loan officer with the First National Bank. She interviews a potential loan customer to find out exactly why the person needs the loan and whether he would be serious about repaying the loan. Which step in the lending process is Shelby performing? A. Finding prospective customers B. Evaluating a customer's character and sincerity C. Making a site visit and evaluating a customer's credit history D. Evaluating a prospective customer's financial condition E. Assessing possible collateral and signing the loan agreement

Q: Dan Cross is a junior loan officer with First State Bank of Durant. He has been busy visiting local businesses to see if any of them need credit. Which step in the lending process is Dan performing? A. Finding prospective customers B. Evaluating a customer's character and sincerity C. Making a site visit and evaluating a customer's credit history D. Evaluating a prospective customer's financial condition E. Assessing possible collateral and signing the loan agreement

Q: The law that prevents individuals from being denied credit because of race, sex, religious affiliation, age or receipt of public assistance is called: A. The Sarbanes-Oxley Act. B. The Community Reinvestment Act. C. The Equal Credit Opportunity Act. D. The Truth in Lending Act. E. None of the options is correct.

Q: The law that requires banks to make an affirmative effort' to meet the credit needs of individuals and businesses in their trade territories is called: A. The Sarbanes-Oxley Act. B. The Community Reinvestment Act. C. The Equal Credit Opportunity Act. D. The Truth in Lending Act. E. None of the options is correct.

Q: A loan that examiners regard as uncollectible and unsuitable to be called a bank asset is called a: A. criticized loan. B. scheduled loan. C. substandard loan. D. doubtful loan. E. loss loan.

Q: Loans that examiners consider as having significant weaknesses or those represent a dangerous concentration of credit in one borrower or industry are called: A. criticized loans. B. scheduled loans. C. substandard loans. D. doubtful loans. E. loss loans.

Q: The Second National Bank has capital and surplus of $100 million. The bank has decided that the most that it can loan to the Krumlova Manufacturing Company is $15 million. What factor determining the growth and mix of loans does this most likely reflect for the bank? A. Characteristics of the market area B. Lender size C. The experience and expertise of management D. The written loan policy of the bank E. Bank regulations

Q: First State Bank's loan policy manual states that the goal of the bank is to make high quality loans for home mortgages, the purchase of automobiles and small business accounts receivables'. What factor determining the growth and mix of loans does this fact reflect? A. Characteristics of the market area B. Lender Size C. The experience and expertise of management D. The written loan policy of the bank E. Bank regulations

Q: Geoff Willis and Mary Williams, president and CEO respectively of the First National Bank of Edmond, come from a background in retail banking. As a strategic initiative, they have decided to focus their lending activities on consumer loans and loans to small business. What factor determining the growth and mix of loans does this fact reflect? A. Characteristics of the market area B. Lender size C. The experience and expertise of management D. The written loan policy of the bank E. Bank regulations

Q: The Second State Bank has less than $100 million in assets and as a result primarily makes real estate loans, other consumer loans and loans to very small businesses. What factor determining the growth and mix of loans does this fact reflect? A. Characteristics of the market area B. Lender size C. The experience and expertise of management D. The written loan policy of the bank E. Bank regulations

Q: The First State Bank is located in Guyman which is in the middle of the wheat country of Oklahoma and as a result many of its loans are agriculture loans. What factor determining the growth and mix of loans does this fact reflect? A. Characteristics of the market area B. Lender size C. The experience and expertise of management D. The written loan policy of the bank E. Bank regulations

Q: The Third National Bank of Wichita makes a loan so that Tim Bridges can buy 1,000 shares of Coca Cola stock. Which category of loans would this loan fit in best? A. Financial institution loan B. Commercial and industrial loan C. Loan to an individual D. Miscellaneous loan E. Lease financing receivables

Q: The First State Bank of Duncan buys railroad cars and rents them to the Santa Fe Railroad Company. What type of loan has this bank made? A. Financial institution loan B. Commercial and industrial loan C. Loan to an individual D. Miscellaneous loan E. Lease financing receivables

Q: The Price Bank of Edmond makes a loan to Home Depot. What type of loan has this bank made? A. Financial institution loan B. Commercial and industrial loan C. Loan to an individual D. Miscellaneous loan E. Lease financing receivables

Q: A loan for Colin Beverly to purchase a new Mazda Miata would fit into which of the following categories of bank loans? A. Financial institution loan B. Commercial and industrial loan C. Loan to an Individual D. Miscellaneous loan E. Lease financing receivables

Q: The South Carolina National Bank makes a loan to the Heritage Credit Union. What type of loan did this bank make? A. Financial institution loan B. Commercial and industrial loan C. Loans to individuals D. Miscellaneous loans E. Lease financing receivables

Q: A method whereby a loan officer focuses on why a borrower's cash flows may change over time is known as: A. indirect cash flow. B. direct cash flow. C. pervasive cash flow. D. variable cash flow. E. total cash flow.

Q: Which of the following requires that bank loans to insiders be priced at market rates? A. Community Reinvestment Act of 1977 B. Equal Credit Opportunity Act of 1974 C. Sarbanes-Oxley Act of 2002 D. Bank Lending Act of 2003 E. U.S. Patriot Act

Q: A lender reviews the partnership agreement of one of its small business customers. Which of the 6 Cs of lending would this piece of information belong to? A. Character B. Capacity C. Cash D. Collateral E. Conditions

Q: Which of the following should be part of the written loan policy? A. Lending authority of each loan officer and loan committee B. Lines of responsibility for finding and reporting information within the loan department C. A statement of quality standards for all loans D. A statement for the preferred upper limit for total loans outstanding E. All of the options should be part of the written loan policy

Q: Which of the following is a sign of a potential loan problem? A. Timely receipt of financial statements from the company that has taken a loan B. Regular increase in the stock price of the company that has taken a loan C. Increase in earnings for each of the last three years of a company that has taken a loan D. Changes in the methods used to account for inventory, depreciation, and other items E. All of the options are signs of problems with the loan

Q: The process of resolving a troubled loan so that a lender can recover its funds is called: A. loan review. B. written loan policy. C. loan workout. D. loan commitment agreement. E. None of the options is correct.

Q: A bank that primarily makes its loans to individuals, families, and small businesses is categorized as: A. a retail bank B. a wholesale lender C. a money center bank D. a money market bank E. None of the options is correct

Q: The TRC Company is required by its bank to pay no dividend over $3 per share. What is this restraint known as? A. An affirmative covenant B. A negative covenant C. A special covenant D. A horizontal covenant E. None of the options is correct

Q: A loan officer of Second National Bank of Laramie decides to review the insurance coverage of one of its business customers. Which of the 6 Cs of lending would this piece of information belong to? A. Character B. Capacity C. Cash D. Collateral E. Conditions

Q: First National Bank of Edmond asks a prospective customer for her driver's license. Which of the 6 Cs of lending would this piece of information belong to? A. Character B. Capacity C. Cash D. Collateral E. Conditions

Q: Sean Carter has an excellent credit rating. Which of the 6 Cs of lending would this piece of information belong to? A. Character B. Capacity C. Cash D. Collateral E. Conditions

Q: A lender that makes a loan to an individual whose only income is commission based and who hasn't made a sale in six weeks may be violating which of the 6 Cs of lending? A. Character B. Capacity C. Cash D. Control E. Collateral

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

Q: A loan to a local business to purchase a new machine would be categorized as: A. a consumer loan. B. an agriculture loan. C. a commercial and industrial loan. D. a real estate loan. E. None of the options is correct.

Q: Which of the following is a factor in determining the mix of loans that a bank has? A. Location of the bank B. Size of the bank C. Written loan policy of the bank D. Experience and expertise of the management E. All of the options are factors in determining the mix of loans for a bank

Q: A lender that makes a loan that violates its written loan policy would be violating which of the 6 Cs of lending? A. Character B. Capacity C. Cash D. Control E. Collateral

Q: A lender that makes a loan to a minor would be violating which of the 6 Cs of lending? A. Character B. Capacity C. Cash D. Control E. Collateral

Q: Loans granted to businesses to cover such expenses as purchasing inventories, paying taxes, and meeting payrolls are known as: A. commercial and industrial loans. B. agricultural loans. C. real estate loans. D. loans to individuals. E. None of the options is correct.

Q: Loans extended to farm and ranch operations to assist in planting and harvesting crops and to support the feeding and care of livestock are known as: A. real estate loans. B. commercial and industrial loans. C. land loans. D. agricultural loans. E. None of the options is correct.

Q: Loans providing credit to finance the purchase of automobiles, mobile homes, appliances, and other retail goods to repair and modernize homes are classified under the category: A. financial institution loans. B. commercial industrial. C. loans to individuals. D. miscellaneous loans. E. None of the options is correct.

Q: Loans to finance one-to-four family homes fall under which loan category? A. Commercial and industrial loans B. Real estate loans C. Loans to individuals D. Single-payment loans E. None of the options is correct.

Q: Real estate loans made by national banks in the U.S. cannot exceed: A. 15 percent of that bank's total assets or 25 percent of its total capital. B. that bank's total capital and surplus or 70 percent of its time and savings deposits, whichever is greater. C. 20 percent of that bank's capital and surplus or 80 percent of its savings deposits, whichever is lesser. D. 25 percent of capital or 10 percent of core deposits of the bank, whichever is higher. E. None of the options is correct.

Q: In the United States, national banks cannot extend an unsecured loan to a single borrower that exceeds _____________ of the bank's capital and surplus. A. 25 percent B. 10 percent C. 15 percent D. 20 percent E. None of the options is correct

Q: The maximum outstanding loans for all FDIC-insured institutions are classified as: A. lease financing receivables. B. miscellaneous loans. C. loans to depository institutions. D. real estate loans. E. agricultural loans.

Q: Banks that emphasize on lending to commercial customers are categorized as: A. wholesale banks. B. retail banks. C. personal banks. D. investment banks. E. regional banks.

Q: According to the textbook, the largest category (by dollar volume) of loans extended by U.S. banks is: A. real estate loans. B. financial institution loans. C. agricultural loans. D. commercial and industrial loans. E. None of the options is correct.

Q: Loans extended to finance the purchase of automobiles, mobile homes, home appliances, and vacations are classified as: A. real estate loans. B. financial institution loans. C. agricultural loans. D. commercial and industrial loans. E. None of the options is correct.

Q: Under Basel III, more flexible capital standards which includes the "buffer concept" means involvement of which two ratios? A. Base capital and leverage ratio B. Base capital and buffer ratio C. Capital and risk-weighted assets ratio D. Leverage and buffer ratio E. Risk-weighted assets ratio and buffer ratio

Q: Interbank deposits generally carry: A. low credit risk. B. high credit risk. C. highest credit risk. D. moderate credit risk. E. zero credit risk.

Q: ________________________ represent(s) funds set aside for contingencies, such as legal action against the institution or a sinking fund to retire stock or debt in the future. A. Undivided profits B. Surplus C. Preferred stock D. Common stock E. Equity reserves

Q: Along with the value at risk model, which is the other model that determines each bank's unique market risk exposure and the amount of capital it needs? A. Internal modeling. B. Systemic modeling. C. Credit risk modeling. D. Borrower credit ratings. E. Damage testing.

Q: A standby letter of credit, backing the issue of state and local government general obligation bonds, is given a credit risk-weight of 20 percent because of its: A. modest credit risk. B. zero credit risk. C. moderate credit risk. D. low credit risk. E. highest credit risk.

Q: According to the text, Basel II agreement had resulted in less total capital and: A. less concentration on operating risk. B. a weaker mix of capital. C. more retention ratio. D. less concentration on assets. E. a weaker leverage ratio.

Q: Which of the following is an internal assessment tool that is used by the participating banks to ensure that they are prepared for the possibly damaging impact of ever changing market conditions? A. Backtesting B. Risk aggregation C. Stress testing D. Systemic testing E. Damage testing

Q: The following are the advantages of Basel II over Basel I except that: A. it performs supervisory review of each bank's risk-assessment procedures. B. it provides for greater sensitivity to arbitrage and financial innovations. C. it applies the same minimum capital requirements to all banks. D. it broadens the types of risk considered. E. All are advantages of using Basel II.

Q: Which of the following are the reasons for having the government set capital standards for financial institutions as opposed to letting the private marketplace set those standards? A. To preserve public confidence B. To remove each bank's unique asset risk exposure C. To limit losses to the federal government arising from deposit insurance claims D. To preserve public confidence and to limit losses to the federal government arising from deposit insurance claims E. None of the options is correct.

Q: A bank has issued $5,000,000 in long term debt and since that time interest rates have risen so that it will only cost the bank $3,000,000 to buy the long term debt back. The bank decides to issue $3,000,000 in new stock and use the proceeds to retire the long term debt. What way of meeting their capital needs is the bank taking? A. Issuing common stock B. Issuing preferred stock C. Issuing subordinated notes and debentures D. Selling assets and leasing facilities E. Swapping stock for debt instruments

Q: Why do banks generally prefer lower capital requirements? A. To minimize the impact shareholders have on management decisions B. To increase the influence of bank regulators C. To increase a bank's return on equity D. To increase depositor protection E. To maximize operating leverage

Q: Why do regulators prefer higher capital requirements? A. It justifies the existence of regulatory agencies. B. It protects the deposit insurance fund from serious losses. C. It enhances bank asset quality. D. It decreases bank profitability. E. It increases bank leverage.

Q: The Northwest Bank of Charlotte has decided to issue new securities that have five years to maturity that have claims to assets that follow the claims of depositors. What way of meeting their capital needs is the bank taking? A. Issuing common stock B. Issuing preferred stock C. Issuing subordinated notes and debentures D. Selling assets and leasing facilities E. Swapping stock for debt instruments

Q: The Third State Bank of Denton has decided to issue stock through a trust company and borrow the funds from the trust company. This stock pays a fixed dividend and because of the way the stock has been issued it is tax deductible. What way of meeting their capital needs in the bank taking? A. Issuing common stock B. Issuing preferred stock C. Issuing subordinated notes and debentures D. Selling assets and leasing facilities E. Swapping stock for debt instruments

Q: The Second National Bank of Lincoln has decided that, to raise funds it is going to issue new common equity through a pre-emptive rights offering, so that current owners will not have that ownership diluted. What way of meeting their capital needs is the bank taking? A. Issuing common stock B. Issuing preferred stock C. Issuing subordinated notes and debentures D. Selling assets and leasing facilities E. Swapping stock for debt instruments

Q: The First National Bank of Tucson has determined that the value of their property in Tucson has tripled in the last three years. They decide that they would like to use this property to raise funds and will rent space from the new owners of the building. What way of meeting their capital needs is the bank taking? A. Issuing common stock B. Issuing preferred stock C. Issuing subordinated notes and debentures D. Selling assets and leasing facilities E. Swapping stock for debt instruments

Q: A bank has decided to retain more of their earnings, moving their retention ratio from 40% to 70%. What way of meeting their capital needs is the bank taking? A. Changing their dividend policy B. Issuing common stock C. Issuing preferred stock D. Issuing subordinated notes and debentures E. Selling assets and leasing facilities

Q: Which of the following is not a weakness of Basel I risk-based capital standards? A. They ignore interest rate risk B. They ignore changes in value due to currency value changes C. They ignore changes in value due to commodity price changes D. They ignore credit risk E. They ignore the market value

Q: A bank has capital to risk-weighted assets of 1.8%. What type of bank is this? A. Well capitalized B. Adequately capitalized C. Undercapitalized D. Significantly undercapitalized E. Critically undercapitalized

Q: A bank has capital to risk-weighted assets of 5.5%, Tier 1 capital to risk-weighted assets of 2.8% and a leverage ratio of 2.6%. What type of bank is this? A. Well capitalized B. Adequately capitalized C. Undercapitalized D. Significantly undercapitalized E. Critically undercapitalized

Q: There are three pillars of Basel II. One of them is to make market discipline a powerful force compelling risky banks to lower their risk exposure. What does Basel II want to do to make this happen? A. Require minimum capital requirement based on the bank's own evaluation of its risk. B. Require greater public disclosure of each bank's true financial condition. C. Expand the risks to be evaluated to include credit risk market risk, and operational risk. D. Require a supervisory review of each bank's risk evaluation procedures. E. All of the options are correct.

Q: Even if individual banks are good at forecasting risk using VaR models, there may still be problems because losses may occur at several banks at the same time due to the interdependency of the financial system, magnifying each bank's risk exposure and possibly causing a major problem for regulators. The book calls this: A. systemic risk. B. operational risk. C. credit risk. D. market risk. E. liquidity risk.