Exam 20: Managing Credit Risk on the Balance Sheet

A well-managed bank tries to keep the ratio of nonperforming loans to total loans at about 8 percent to 10 percent.

The EDF model uses the borrower's current market value of equity and assets and the option-pricing model to

Individuals with higher levels of income must have higher GDS and TDS ratios to qualify for a loan.

A bank has a base loan rate of 4.75 percent and for the loan under consideration it would apply a 2 percent risk premium. The bank also requires compensating balances (noninterest-bearing)equal to 5 percent of the loan amount. The bank's reserve requirements are 10 percent. The bank charges 1 percent of the loan amount as an origination fee. The borrower is asking for a $500,000 loan. Calculate the ROA on the loan.

A firm's cash account grew by $300 over the year when the firm had cash flow from financing of -$150 and cash flow from investing of $100. The firm's operating cash flow must have been +$250.

Credit analysis of a mid-market corporate borrower differs from the analysis of a small business in that the analysis of the mid-market borrower is more focused on the business itself and less on the business owners.

Why won't a loan officer usually approve a loan solely on the basis of collateral?

Asset management ratios are used in credit analysis to help understand the borrower's ability to generate sales from the amount invested in some asset category.

Big Valley is collecting their receivables about __________________ than the typical firm.

A rising sales to working capital ratio may indicate a potential borrower is using its net current assets more efficiently.

A corporate loan applicant has had a growing cash account for the last three years,but cash flow from operations has been negative in every year. Would this concern you if you were the loan officer charged with approving the loan? If so,why? If not,why not?