Exam 20: Managing Credit Risk on the Balance Sheet

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

The base loan rate accounts for I. the FI's weighted average cost of capital. II. the FI's marginal cost of funds. III. the credit risk of the loan.

GDS cutoff: 30 percent TDS cutoff: 35 percent Using only the GDS criteria,which one of the following statements is true?

A $40,000 one-year loan with a 1 percent origination fee and a 7.50 percent interest rate is funded with money on which the bank owes 3 percent. What is the expected pretax dollar spread on the loan? If the bank needs to net at least 3.5 percent on the funds lent to make its ROE,how many dollars can the bank spend on credit investigation,loan servicing,and so forth? Would the bank be able to spend more if the loan amount was greater? What does this example suggest about credit analysis?

Analysis of the statement of cash flows involves assessment of operating,financing and investing cash flows and analysis of the resulting net income.

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)?

Explain how the Moody's Analytics Model predicts bankruptcy probability.

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

The ratio that measures the firm's efficiency in utilizing its assets to generate revenue is:

Interest is Big Valley's only fixed cash charge. Big Valley's market value of equity to book value of debt ratio = 1.5. Big Valley's current ratio indicates that Big Valley is ________ liquid than the typical firm in the industry,and Big Valley's quick ratio indicates that Big Valley is ________ liquid than the typical firm.

Nonperforming loans are loans that are past due ________ that are not accruing interest.

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

A firm with a low Z-score has high

Before allowing the borrower to actually acquire the funds for a mid-market collateralized loan,what must the lender ensure? What type of monitoring occurs by the lender after the loan is granted?

A bank is using the RAROC to evaluate large business loans. The benchmark rate of return is 7.55 percent. The one-year loan interest rate is 8.00 percent and the bank must pay 7.40 percent to raise the funds. The cost to service the loan is 0.3 percent. If the loan defaults,92 percent of the money lent will be lost. Based on historical default rates,the extreme worst-case loss scenario is about 5 percent. Should the bank make the loan? Why or why not?

If you are a lender evaluating a loan application and you calculate the following ratio: (EBIT + Lease Payments)/[Interest + Lease Payments + (Sinking Fund/(1 − T))],then you are calculating a debt service ratio and it should be less than one in order to approve the loan.

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

Interest is Big Valley's only fixed cash charge. Big Valley's market value of equity to book value of debt ratio = 1.5. Big Valley's return on equity indicates that the firm generates a ________ return to their shareholders than their peers.

Interest is Big Valley's only fixed cash charge. Big Valley's market value of equity to book value of debt ratio = 1.5. Big Valley is collecting their receivables about ________ than the typical firm.

As long as overall cash flow growth is positive,a bank loan officer would not be concerned if cash flow from operations was projected to be negative over the term of the loan.