Question 1

Which one of the following is usually the better predictor of default?

Accepted Answer

A) Standard & Poor's credit rating 
B) Moody's credit rating 
C) Altman Z-score 
D) Moody's Analytics EDF 
E) All of the methods are equally effective at predicting default. 
A) Standard & Poor's credit rating 
B) Moody's credit rating 
C) Altman Z-score 
D) Moody's Analytics EDF 
E) All of the methods are equally effective at predicting default.

Question 2

Gross debt service usually must be greater than 30 percent before a residential mortgage will be approved.

Accepted Answer

A) True 
 B)False

Question 3

For most business loans,growing earnings are not a sufficient reason to grant a loan. Why?

Accepted Answer

Collateral is still important because ec

Question 4

The more variable a borrower's cash flows are,the lower the fixed charge coverage ratio should be to limit risk

Accepted Answer

A) True 
 B)False

Question 5

A corporate customer obtains a $1.5 million loan from a bank. The customer agrees to pay a 6.25 percent interest rate and agrees to make compensating balances of 4 percent of the loan amount. These will be held in noninterest-bearing transactions deposits at the bank for one year. The bank charges a 1 percent loan origination fee on the amount borrowed. Reserve requirements are 10 percent. What is the expected rate of return to the bank (k)(to the nearest basis point)?

Accepted Answer

A) 6.95 percent 
B) 7.52 percent 
C) 7.99 percent 
D) 8.01 percent 
E) 8.45 percent 
A) 6.95 percent 
B) 7.52 percent 
C) 7.99 percent 
D) 8.01 percent 
E) 8.45 percent

Question 6

A bank charges a commercial borrower a 6.55 percent interest rate on a one-year loan. The bank also charges a 0.5 percent origination fee and requires compensating balances of 7 percent in the form of demand deposits. Reserve requirements are 10 percent. What is the promised gross rate of return on the loan?

Accepted Answer

A) 8.45 percent 
B) 7.89 percent 
C) 9.10 percent 
D) 7.52 percent 
E) 6.95 percent 
A) 8.45 percent 
B) 7.89 percent 
C) 9.10 percent 
D) 7.52 percent 
E) 6.95 percent

Question 7

Explain what each ratio in the Altman credit model measures and explain why higher values of each of the variables predict lower default probability.

Accepted Answer

The variab

Question 8

Big Valley's use of debt to finance assets indicates that Big Valley has ____________ the typical firm in the industry.

Accepted Answer

A) more long-term solvency risk than 
B) the same long-term solvency risk as 
C) less interest expense than 
D) less long-term solvency risk than 
E) a lower market value of equity to book value of equity ratio than 
A) more long-term solvency risk than 
B) the same long-term solvency risk as 
C) less interest expense than 
D) less long-term solvency risk than 
E) a lower market value of equity to book value of equity ratio than

Question 9

_____________________ is the process of taking possession of the mortgaged property to satisfy the debt in the event of failure to repay the mortgage and foregoing claim to any deficiency.

Accepted Answer

A) Perfecting collateral 
B) Foreclosure 
C) Power of sale 
D) Conditions precedent 
E) Lien enforcement 
A) Perfecting collateral 
B) Foreclosure 
C) Power of sale 
D) Conditions precedent 
E) Lien enforcement

Question 10

Provision for loan losses,net charge-offs,and the percentage of nonperforming loans all increased dramatically in 2007.

Accepted Answer

A) True 
 B)False

Question 11

A bank can charge a corporate borrower 6.25 percent on a loan. The borrower is asking for a $600,000 loan. The extreme loss rate on this loan type is 4.0 percent and,when default occurs,about 15 percent of the loan amount is recovered. The interest and noninterest cost of the loan is 5.85 percent. What is the RAROC of the loan?
 Under what circumstances should the bank make the loan?

Accepted Answer

RAROC = Net first-year $ income on the L

Question 12

Big Valley's fixed asset efficiency is ___________ that of the typical firm in the industry.

Accepted Answer

A) the same as 
B) lower than 
C) higher than S/FA = (275 + 500)/400 = 1.9375; Peer S/FA = 1.8 
A) the same as 
B) lower than 
C) higher than S/FA = (275 + 500)/400 = 1.9375; Peer S/FA = 1.8

Question 13

The conditions specified in a credit agreement that must be fulfilled before a drawdown is allowed are called

Accepted Answer

A) collateral perfection. 
B) power of sale conditions. 
C) conditions precedent. 
D) foreclosure agreements. 
E) audit review terms. 
A) collateral perfection. 
B) power of sale conditions. 
C) conditions precedent. 
D) foreclosure agreements. 
E) audit review terms.

Question 14

Mid-market commercial lending may be typically defined as borrowers
I. with sales revenue between $5 million and $100 million.
II. with a recognizable corporate structure.
III. with ready access to deep and liquid capital markets.

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II only 
E) I,II,and III 
A) I only 
B) II only 
C) III only 
D) I and II only 
E) I,II,and III

Question 15

In concept,the RAROC measure indicates a loan is acceptable if the RAROC is greater than the

Accepted Answer

A) borrower's ROE. 
B) lender's ROA. 
C) borrower's ROA. 
D) lender's ROE. 
E) NCO rate. 
A) borrower's ROE. 
B) lender's ROA. 
C) borrower's ROA. 
D) lender's ROE. 
E) NCO rate.

Question 16

Why is bank lending to large corporations more difficult than making loans to small or mid-size firms?
 What additional factors are involved?
 Do banks have some additional tools to help in assessing credit risk of large firms?
 What are some examples?

Accepted Answer

* Banks have reduced bargaining power on

Question 17

Which one of the following five Cs of credit is NOT correctly defined?

Accepted Answer

A) Capacity-Whether the borrower has enough other credit available to pay off the loan in the event of cash flow problems. 
B) Capital- The borrower's equity. 
C) Character-A measure of the borrower's intention/willingness to repay the loan. 
D) Conditions-Assessing how economic conditions could affect the borrower's ability to repay the loan. 
E) Collateral-An asset of the borrower that the lender may seize in the event of default on the loan. 
A) Capacity-Whether the borrower has enough other credit available to pay off the loan in the event of cash flow problems. 
B) Capital- The borrower's equity. 
C) Character-A measure of the borrower's intention/willingness to repay the loan. 
D) Conditions-Assessing how economic conditions could affect the borrower's ability to repay the loan. 
E) Collateral-An asset of the borrower that the lender may seize in the event of default on the loan.

Question 18

What are the five Cs of credit?
 Briefly describe each.

Accepted Answer

Character: Character of applicant; appli

Question 19

A corporate loan applicant has cash of $40,receivables of $50,and inventory of $20. The applicant also has current debts of $65. If the bank's policy requires a current ratio of 1.75 or better and an acid test ratio of 1.25 or better would the applicant receive the loan?

Accepted Answer

A) Yes,because the applicant's current ratio and acid test ratios are acceptable. 
B) No,because the applicant's current ratio and acid test ratios are both unacceptable. 
C) No,because although the applicant's current ratio is acceptable,its acid test ratio is not. 
D) No,because although the applicant's acid test ratio is acceptable,its current ratio is not. 
A) Yes,because the applicant's current ratio and acid test ratios are acceptable. 
B) No,because the applicant's current ratio and acid test ratios are both unacceptable. 
C) No,because although the applicant's current ratio is acceptable,its acid test ratio is not. 
D) No,because although the applicant's acid test ratio is acceptable,its current ratio is not.

Question 20

Explain the purpose/benefits in adding a credit-scoring model to evaluate a loan application.

Accepted Answer

Credit-score models allow the loan offic

Exam 20: Managing Credit Risk on the Balance Sheet

Which one of the following is usually the better predictor of default?

Gross debt service usually must be greater than 30 percent before a residential mortgage will be approved.

For most business loans,growing earnings are not a sufficient reason to grant a loan. Why?

The more variable a borrower's cash flows are,the lower the fixed charge coverage ratio should be to limit risk

Explain what each ratio in the Altman credit model measures and explain why higher values of each of the variables predict lower default probability.

Big Valley's use of debt to finance assets indicates that Big Valley has ____________ the typical firm in the industry.

_____________________ is the process of taking possession of the mortgaged property to satisfy the debt in the event of failure to repay the mortgage and foregoing claim to any deficiency.

Provision for loan losses,net charge-offs,and the percentage of nonperforming loans all increased dramatically in 2007.

Big Valley's fixed asset efficiency is ___________ that of the typical firm in the industry.

The conditions specified in a credit agreement that must be fulfilled before a drawdown is allowed are called

Mid-market commercial lending may be typically defined as borrowers I. with sales revenue between $5 million and $100 million. II. with a recognizable corporate structure. III. with ready access to deep and liquid capital markets.

In concept,the RAROC measure indicates a loan is acceptable if the RAROC is greater than the

Why is bank lending to large corporations more difficult than making loans to small or mid-size firms? What additional factors are involved? Do banks have some additional tools to help in assessing credit risk of large firms? What are some examples?

Which one of the following five Cs of credit is NOT correctly defined?

What are the five Cs of credit? Briefly describe each.

A corporate loan applicant has cash of $40,receivables of $50,and inventory of $20. The applicant also has current debts of $65. If the bank's policy requires a current ratio of 1.75 or better and an acid test ratio of 1.25 or better would the applicant receive the loan?

Explain the purpose/benefits in adding a credit-scoring model to evaluate a loan application.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters