Q&A Hero

Q: is where the lender buys equipment or vehicles and rents them to its customers.

Q: include credit to finance the purchase of automobiles, mobile homes, appliances and other retail goods and many other purchases by consumers.

Q: are loans granted to businesses to cover purchases of inventory, paying taxes and meeting payrolls.

Q: An approach in which the lending officer focuses on changes in borrower cash flows over time is known as the _____________ cash flow method.

Q: A banks__________________________________________ gives loan officers specific guidelines in making individual loan decisions and in shaping the overall loan portfolio.

Q: ______________ is one of the key features of any loan. This C of lending examines whether the borrower will have enough sales or income to repay the loan.

Q: A(n)______________ is the process of resolving a troubled loan so the bank can recover its funds.

Q: ______________ are loans that carry a strong probability of loss to the bank.

Q: ___________________________ are when lenders extend credit to banks, insurance companies, and finance companies among others.

Q: ____________________________ are those things a borrower must do. They are actions the borrower must take. Examples include filing periodic financial statements with the bank and purchasing insurance on any collateral pledged.

Q: A______________ is signed by the borrower and indicates the principal amount of the loan, the interest rate on the loan and the terms under which repayment must take place.

Q: ____________________________ are loans which are secured by land buildings and other structures. These loans can be short term construction loans or longer term loans to finance the purchase of homes and apartments among others.

Q: ____________________________ devote the bulk of their credit portfolio to large-denomination loans to corporations and other businesses and tend to be large banks.

Q: ____________________________ are loans extended to farmers and ranchers to assist in planting crops, harvesting crops and to support the feeding and care of livestock.

Q: Loans that have minor weaknesses because the bank has not followed its written loan policy or which have missing documentation are called______________ by regulators.

Q: When a bank purchases a whole loan or a piece of a loan from another bank they are purchasing what is known as a____________________________.

Q: One of the 6 Cs of lending,______________ suggests that the lender must look to see if the borrower is legally entitled to sign a binding loan agreement. For an individual this entails making sure the borrower is of legal age to sign a contract.

Q: One of the 6 Cs of lending,______________ suggests that the lender must look at the position of the business firm in the industry and the outlook of the industry to evaluate a loan.

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 customers character and sincerity C) Making a site visit and evaluating a customers credit history D) Evaluating a prospective customers 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 customers character and sincerity C) Making a site visit and evaluating a customers credit history D) Evaluating a prospective customers 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 customers character and sincerity C) Making a site visit and evaluating a customers credit history D) Evaluating a prospective customers 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 they would be serious about repaying the loan. Which step in the lending process is Shelby performing? A) Finding prospective customers B) Evaluating a customers character and sincerity C) Making a site visit and evaluating a customers credit history D) Evaluating a prospective customers 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 of any of them need credit. Which step in the lending process is Dan performing? A) Finding prospective customers B) Evaluating a customers character and sincerity C) Making a site visit and evaluating a customers credit history D) Evaluating a prospective customers 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 above

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 above

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: A loan that appears to examiners to contain significant weaknesses or that 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 mixture of loans does this most likely reflect for this 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 Banks 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 mixture 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 the president and CEO of the First National Bank of Edmond both come from a background of retail banking. As a result they have decided to focus their lending activities on consumer loans and loans to small business. What factor determining the growth and mixture 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 mixture 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, Oklahoma 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 mixture 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 1000 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 the loan officer focuses on how the borrower 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 act requires that bank loans to insiders be priced at market? 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: The following are the advantages of Basel II over Basel I except: A) Uses bifurcated system that takes into consideration differences in risk exposures by bank size B) Provides for greater sensitivity to arbitrage and financial innovations C) Applies the same minimum capital requirements to all banks D) Broadens the types of risk considered E) All of the above are the 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 alleviate market imperfections arising from the mispriced effect of systemic failures C) To limit losses to the federal government arising from deposit insurance claims D) All of the above E) None of the above

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 banks 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 better protects the deposit insurance fund 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: A bank has capital to risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 4.5% and a leverage ratio of 3.7%. 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 9.2%, Tier 1 capital to risk weighted assets of 5% and a leverage ratio of 4.8%. 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 11.5%, Tier 1 capital to risk weighted assets of 7.2% and a leverage ratio of 5.8%. 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 wants 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 banks own evaluation of its risk B) Require greater public disclosure of each banks true financial condition C) Expand the risks to be evaluated to include credit risk, market risk and operational risk D) Require supervisory review of each banks risk evaluation procedures E) All of the above

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 banks risk exposure and possibly causing a major problem for regulators. The book calls this: A) Systematic risk B) Operational risk C) Credit risk D) Market risk E) Liquidity risk

Q: What type of preferred stock has become popular among large banks in recent years, partly because dividends paid are tax deductible for the issuing institution? A) Cumulative preferred stock B) Noncumulative preferred stock C) Convertible preferred stock D) Trust preferred stock E) All of the above

Q: The Norton Bank of Illinois has just issued trust preferred stock. What defense against risk is this bank making? A) Portfolio diversification B) Geographic diversification C) Quality management D) Increasing owners capital E) All of the above

Q: The Perdue Bank of Houston has just hired a new manager who has a reputation of anticipating potential problems and acting quickly to prevent those problems so that the bank stays healthy and profitable. What defense against risk is this bank making? A) Portfolio diversification B) Geographic diversification C) Quality management D) Increasing owners capital E) All of the above

Q: The Michelson Bank of Stetson wants to protect itself from risk. It decides to make loans in Florida, Georgia, Texas and Oklahoma as well as invest in municipal bonds from California and Oregon. What defense against risk is this bank making? A) Portfolio diversification B) Geographic diversification C) Quality management D) Increasing owners capital E) All of the above

Q: The Jennings Bank of Texas wants to protect itself from credit risk by making large loans to corporate customers, by making residential mortgages to families, by making agriculture loans to farmers and ranchers in the area, by making small business loans to business along main street and by making automobile loans for the car dealership across the street from the bank. What defense against risk is this bank making? A) Portfolio diversification B) Geographic diversification C) Quality management D) Increasing owners capital E) All of the above

Q: Which of the following would not be an example of operational risk? A) A bank on the coast of Louisiana is hit by a hurricane and is flooded for 6 weeks B) A bank employee acting as a derivatives trader is also the one who writes the reports on profits and losses in derivatives trading at the end of each day C) The banks older computer system breaks down causing a loss of service to customers for 2 weeks D) A bank robber robs a teller at gun point and gets away before police can get to the bank E) All of the above are examples of operational risk

Q: Which of the following would be an example of liquidity risk? A) A bank teller manages to steal $250,000 over a period of several months B) An out of date computer system causes the bank to lose $750,000 C) A bank is forced to sell $1,000,000 in loans at a loss in order to meet the needs of depositors D) A $500,000 loan the bank has made has been deemed uncollectable E) None of the above are examples of liquidity risk

Q: Which of the following would be an example of operational risk? A) A bank teller manages to steal $250,000 over a period of several months B) An out of date computer system causes the bank to lose $750,000 C) A bank is forced to sell $1,000,000 in loans at a loss in order to meet the needs of depositors D) A $500,000 loan the bank has made has been deemed uncollectable E) None of the above are examples of operational risk

Q: Which of the following would be an example of interest rate risk? A) A bank manager embezzles $1,000,000 from the bank B) A bank that loses $500,000 from trading in foreign currencies C) A $1,000,000 loan to a business on which no interest or principal has been collected in 2 years D) A bank manager predicts interest rates will rise. However interest rates fall causing the banks net income to fall by $250,000 E) All of the above are examples of interest rate risk?

Q: Which of the following would be an example of credit risk? A) A bank manager embezzles $1,000,000 from the bank B) A bank that loses $500,000 from trading in foreign currencies C) A $1,000,000 loan to a business on which no interest or principal has been collected in 2 years D) A bank manager predicts interest rates will rise. However interest rates fall causing the banks net income to fall by $250,000 E) All of the above are examples of credit risk

Q: Which of the following would be an example of exchange risk? A) A bank manager embezzles $1,000,000 from the bank B) A bank that loses $500,000 from trading in foreign currencies C) A $1,000,000 loan to a business on which no interest or principal has been collected in 2 years D) A bank manager predicts interest rates will rise. However interest rates fall causing the banks net income to fall by $250,000 E) All of the above are examples of exchange risk

Q: Basel II has a different set of rules for different bank size categories and the number of categories is: A) two B) three C) four D) five E) ten

Q: For a bank with deficient capital ratios, which of the following actions could be required by regulators to increase the capital ratios, all else constant? A) Cut the bank's dividend payment B) Increase the bank's leverage C) Reduce the banks holdings of cash D) Increase the bank's growth rate by making additional commercial loans. E) Reduce the bank's holdings of Treasury securities.

Q: The issue of correctly adding up all of the different types of bank risk exposure is known as: A) Risk tallying B) Summing risk C) Risk aggregation D) Risk accumulation E) Risk totality

Q: Bank operational risk includes: A) Employee fraud B) Account errors C) Computer breakdowns D) Natural disasters E) All of the above

Q: Bank debt which appears to be highly sensitive to the market perception of the bank's risk is which of the following? A) Deposits B) Fed funds C) Repos D) Subordinated debt capital E) Preferred stock

Q: The revised Basel I rules impose capital requirements for market risk on: A) Only the largest banks B) Only the smallest banks C) Only moderate size banks D) All banks E) No banks

Q: A bank has a net profit margin of 5.25 percent. It has an asset utilization ratio of 45 percent and has an equity multiplier of 12. It retains 40 percent of its earnings each year. What is this bank's internal capital growth rate? A) 28.35 percent B) 2.36 percent C) 11.34 percent D) 4.8 percent E) None of the above

Q: A bank has $200 million in assets in the 0 percent risk-weight category. It has $400 million in assets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of total capital to risk assets? A) 6.08 percent B) 3.04 percent C) 9.11 percent D) 5.54 percent E) None of the above

Q: A bank has $200 million in assets in the 0 percent risk-weight category. It has $400 million in assets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of Tier 2 capital to risk assets? A) 6.08 percent B) 3.04 percent C) 9.11 percent D) 5.54 percent E) None of the above

Q: A bank has $200 million in assets in the 0 percent risk-weight category. It has $400 million in assets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of Tier 1 capital to risk assets? A) 6.08 percent B) 3.04 percent C) 9.11 percent D) 5.54 percent E) None of the above

Q: A bank has a ROE of 14 percent and a ROA of 2 percent. What is this bank's equity capital to total assets ratio? A) 7.00 percent B) 14.29 percent C) 28.00 percent D) 16 percent E) None of the above

Q: Which of the following is in the 20 percent risk-weight (low) category? A) Cash B) General obligation municipal bonds C) Residential mortgage loans D) Credit card loans E) None of the above