Q&A Hero

Q: T F 62. The sum of the default-risk premium plus the term risk premium on a business loan is one of the elements of the cost-plus loan pricing method.

Q: T F 48. Banks are the principal sellers of credit derivatives.

Q: T F 61. The price leadership method of loan pricing includes a markup for default risk, but not for term risk.

Q: T F 47. The credit derivatives market has grown nine-fold during the recent years.

Q: T F 60. The business loan pricing method that relies upon banks knowing what their costs are is the price leadership model.

Q: T F 46. Bank use of credit derivatives is dominated by the largest banks.

Q: T F 45. The advantage of a credit swap is that it allows each bank in the swap to broaden its market area and spread out its credit risk on its loans.

Q: T F 59. The ultimate standard of performance in a market-oriented economy is how much net income remains after all expenses have been charged against revenues.

Q: T F 44. Securitization of loans can easily be applied to business loans since these loans tend to have similar cash flow schedules and comparable risk structures.

Q: T F 58. Liquidity measure a business firm's ability to raise cash in a timely fashion at a reasonable cost.

Q: T F 43. A standby letter of credit substantially reduces the issuing bank's interest rate risk and liquidity risk.

Q: T F 57. The firm's coverage ratios measure how carefully the firm's management monitor and control its expenses.

Q: T F 42. In a CMO, the different tiers (or tranches) of security purchasers face the same prepayment risk.

Q: T F 56. When a bank examines a borrower's operating efficiency they are looking at the protection afforded creditors from the borrower's earnings.

Q: T F 41. Loan sales are generally viewed as risk-reducing for the selling financial institution.

Q: T F 55. If a bank's agent visits a dealer using floorplanning and finds any inventory items sold for which the bank providing financing has not received payment, the loan will be immediately foreclosed upon.

Q: T F 40. Under an assignment ownership of a loan is transferred to the buyer, though the buyer still holds only an indirect claim against the borrower.

Q: T F 54. Floorplanning agreements typically include a loan-loss reserve, built up from interest earned as borrowers repay their installment loans.

Q: T F 39. The buyer of a loan participation must watch both the borrower and the seller bank closely.

Q: T F 53. Under current federal laws a lender is required to make an environmental site assessment of the borrower's property in order to avoid environmental liability.

Q: T F 38. In a participation loan the purchaser is an outsider to the loan contract between the financial institution selling the loan and the borrower.

Q: T F 52. To avoid environmental liability under recent EPA guidelines a lender must accept any bona fide offer for property foreclosed upon if the offer would fully repay the remaining amounts owed.

Q: T F 37. Most loans that banks sell off their balance sheets carry interest rates that usually are connected to long-term interest rates (such as the 30-year Treasury bond rate).

Q: T F 51. Under recent EPA guidelines if a lender forecloses on environmentally damaged property, the lender must post that property for sale within 12 months after securing marketable title.

Q: T F 50. Term loans look primarily to the flow of future earnings of the borrowing business firm to amortize and retire its loan.

Q: T F 35. Securitizations of commercial loans usually carry the same regulatory capital requirements for a bank as the original loans themselves.

Q: T F 49. Term loans normally are secured by accounts receivable and inventory.

Q: T F 34. Securitized assets as a source of bank funds are subject to reserve requirements set by the Federal Reserve Board.

Q: T F 48. A project loan secured by the credit of the company or companies sponsoring the project is called a project loan granted on a recourse basis.

Q: T F 33. Securitization tends to lengthen the maturity of a bank's assets.

Q: T F 47. Leveraged buyouts (LBOs) involve the purchase of businesses or of selected assets from business firms with at least 75 percent of the cost of the purchase funded by current earnings and sales of stock.

Q: T F 32. An account party will seek a bank's standby credit guarantee if the bank's fee for issuing the guarantee is less than the value assigned the guarantee by its beneficiary.

Q: T F 46. Working-capital loans, unlike most other types of business loans, usually do not require the customer to keep a compensating deposit balance with the lending bank.

Q: T F 31. A loan sold by a bank to another investor with recourse means the bank has given the investor a call option on the loan.

Q: T F 45. Working-capital loans are normally secured by a business firm's plant and equipment.

Q: T F 30. Servicing rights on loans sold consist of the collection of interest and principal payments from borrowers and monitoring borrower compliance with loan terms.

Q: T F 44. Short-term (under one year) loans to business firms account for over half of all bank loans to businesses in the United States.

Q: T F 29. Securitization raises the level of competition for the best-quality loans among banks.

Q: T F 43. Self-liquidating business loans are designed to take advantage of the normal cash cycle in a business firm.

Q: T F 28. Securitized assets cannot be removed from a bank's balance sheet until they mature.

Q: T F 42. In the United States about 25 percent of banks' total loans consist of commercial and industrial loans.

Q: T F 27. Securitization has the added advantage of generating fee income for banks.

Q: T F 26. Securitization is designed to turn illiquid loans into liquid assets in the form of securities sold in the open market.

Q: T F 79. The most important factor used in the FICO credit score is the borrower's payment history.

Q: T F 59. The yield to maturity is the discount rate that equates a security’s purchase price with the stream of income expected until it is sold to another investor.

Q: T F 78. One of the elements used in the FICO credit scoring system is the borrower's employment history and salary.

Q: T F 58. If interest rates fall, a callable bond at par has the potential for large increases in price.

Q: T F 77. Currently the debit card market is almost as large as the credit card market.

Q: T F 57. Call risk refers to the right of debt collectors to call in the loans in advance of maturity and get an early repayment.

Q: T F 76. There are very little economies of scale (cost savings) in the credit card business.

Q: T F 56. Inflation risk is the possibility that the purchasing power of interest income and repaid principal from a security or loan will be eroded by rising prices for goods and services.

Q: T F 75. According to the table presented in the book new car loans have a lower interest rate than used car loans.

Q: T F 55. Business risk is the risk that the bank will experience a cash shortage and will have to sell some of its investments securities.

Q: T F 74. According to the table presented in the book credit card loans tend to have the highest interest rates of all consumer loans.

Q: T F 54. One investment maturity strategy, called the front end loaded policy, requires that the bank put all of its investment portfolio in long term securities.

Q: T F 73. According to the table presented in the book personal loans tend to have lower rates than automobile loans.

Q: T F 53. One investment maturity strategy popular among smaller institutions is the ladder or spaced maturity policy. It is popular because it does not take much expertise to implement.

Q: T F 72. Points on a home mortgage loan result in a lender earning a higher effective interest rate on the loan than just the loan rate quoted to the borrower.

Q: T F 52. Interest rate risk is the risk financial institutions face due to changes in market interest rates.

Q: T F 71. The majority of installment and lump-sum payment loans to families and individuals are made with floating interest rates.

Q: T F 51. Treasury notes and bonds are issued by the federal government and are coupon instruments.

Q: T F 70. With the discount rate method interest is deducted first before the customer has use of the proceeds of a loan.

Q: T F 50. Commercial paper is the short term debt instrument issued by major banks.

Q: T F 69. Under the simple interest method the customer saves on interest as an installment loan approaches maturity.

Q: T F 49. Treasury bills are the long term debt obligations issued by the federal government.

Q: T F 68. Unlike the APR method for calculating consumer loan rates, the simple interest approach adjusts for the length of time a borrower actually has use of credit.

Q: T F 48. Lower interest rates increase the present value of all projected cash flows from a loanbacked security so that its market value could rise.

Q: T F 67. The quotation to customers of the APR on the loan they are requesting usually discourages consumers from shopping around according to recent research findings.

Q: T F 47. Stripped mortgage-backed securities make maturity matching of bank assets and liabilities easier to accomplish than do most other investment securities that banks buy.

Q: T F 66. The APR is the internal rate of return on a loan that equates total payments with the amount of the loan.

Q: T F 46. Stripped mortgage-backed securities fully protect investors from having to reinvest their income at lower and lower interest rates.

Q: T F 65. Most consumer loans are priced off some base or cost rate.

Q: T F 45. The principal risk to a financial institution buying CMOs is market risk.

Q: T F 64. An auto loan usually carries with it a chattel mortgage, giving the bank a claim against the property covered by the loan.

Q: T F 44. The principal risk banks face from investing in structured notes is credit (default) risk.

Q: T F 43. When a bank irrevocably guarantees a commercial paper issue, the bank's credit rating substitutes for the borrower's credit rating.

Q: T F 63. Shorter term cash loans to consumers are normally secured, but longer-term consumer loans are usually unsecured.

Q: T F 42. An eligible acceptance is one that can be used as collateral for borrowing from a Federal Reserve bank.

Q: T F 62. Competition for consumer loans tends to drive the interest rates on these loans down closer to loan production costs.

Q: T F 41. Bankers' acceptances are considered to be among the safest of all money market instruments.