Question 1

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

Accepted Answer

Credit-scoring models allow the loan off

Question 2

Describe the credit analysis process for a mid-market corporate loan applicant.

Accepted Answer

The account officer gathers information

Question 3

Issuance of short-term debt would result in an increase in cash flow from operations on the statement of cash flows.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The risk-adjusted return on capital (RAROC)model calculates the actual or promised annual cash flow on a loan as a percentage of the amount lent.

Accepted Answer

A) True 
 B)False

Question 8

Junk bonds usually yield lower returns than investment-grade bonds due to their speculative feature.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

Loan ROA = (0.01 + 0

Question 10

Residential mortgage loan applications have the most diverse application processes that differ from one institution to the other.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

Character: Character of applicant; appli

Question 12

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 13

Individual credit-scoring models typically include all of the following information except

Accepted Answer

A) income. 
B) length of time in residence. 
C) credit history. 
D) age. 
E) ethnic background. 
A) income. 
B) length of time in residence. 
C) credit history. 
D) age. 
E) ethnic background.

Question 14

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. 
E) Yes,because the bank will make the loan regardless of the results. 
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. 
E) Yes,because the bank will make the loan regardless of the results.

Question 15

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 fixed asset efficiency score is ________ which is ________that of the typical firm in the industry.

Accepted Answer

A) 1.8; the same as 
B) 1.54; lower than 
C) 1.94; higher than 
D) 2.15; higher than 
E) 1.32; lower than 
A) 1.8; the same as 
B) 1.54; lower than 
C) 1.94; higher than 
D) 2.15; higher than 
E) 1.32; lower than

Question 16

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

Accepted Answer

A) Joe gets the loan,but Bill does not. 
B) Bill gets the loan,but Joe does not. 
C) Both get the loan. 
D) Neither gets the loan. 
E) The bank does not have money to make the loan. 
A) Joe gets the loan,but Bill does not. 
B) Bill gets the loan,but Joe does not. 
C) Both get the loan. 
D) Neither gets the loan. 
E) The bank does not have money to make the loan.

Question 17

Which ratio measures the firm's ability to pay current interest and lease payments?

Accepted Answer

A) Current ratio 
B) Debt ratio 
C) Time interest earned ratio 
D) Total Assets turnover ratio 
E) Cash-flow-to-debt ratio 
A) Current ratio 
B) Debt ratio 
C) Time interest earned ratio 
D) Total Assets turnover ratio 
E) Cash-flow-to-debt ratio

Question 18

If you were a loan officer evaluating a small business credit application for a loan and you wanted to ensure that the applicant had more than sufficient cash flow to pay off its existing debt,the applicant's cash-flow-to-debt ratio would have to be greater than

Accepted Answer

A) one. 
B) zero. 
C) the TIE ratio. 
D) the interest rate on the debt. 
E) peer average ratio. 
A) one. 
B) zero. 
C) the TIE ratio. 
D) the interest rate on the debt. 
E) peer average ratio.

Question 19

As a business lender,you would prefer that the borrower have stable or growing cash flows resulting from which part of the statement of cash flows?

Accepted Answer

A) Financing cash flows 
B) Cash flows from investment 
C) Operating cash flows 
D) Dividends 
E) Common Stock 
A) Financing cash flows 
B) Cash flows from investment 
C) Operating cash flows 
D) Dividends 
E) Common Stock

Question 20

Based on an option valuation method,the EDF model:

Accepted Answer

A) determine if the equity is mispriced. 
B) calculate the market value of the lender's investment. 
C) estimates the probability that a firm will default over a specified period of time. 
D) estimate the likelihood that the Z-score model is correct. 
E) estimates the probability that the firm's rating will change over a period of time. 
A) determine if the equity is mispriced. 
B) calculate the market value of the lender's investment. 
C) estimates the probability that a firm will default over a specified period of time. 
D) estimate the likelihood that the Z-score model is correct. 
E) estimates the probability that the firm's rating will change over a period of time.

Exam 20: Managing Credit Risk on the Balance Sheet

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

Describe the credit analysis process for a mid-market corporate loan applicant.

Issuance of short-term debt would result in an increase in cash flow from operations on the statement of cash flows.

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

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.

The risk-adjusted return on capital (RAROC)model calculates the actual or promised annual cash flow on a loan as a percentage of the amount lent.

Junk bonds usually yield lower returns than investment-grade bonds due to their speculative feature.

Residential mortgage loan applications have the most diverse application processes that differ from one institution to the other.

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

Individual credit-scoring models typically include all of the following information except

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?

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 fixed asset efficiency score is ________ which is ________that of the typical firm in the industry.

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

Which ratio measures the firm's ability to pay current interest and lease payments?

If you were a loan officer evaluating a small business credit application for a loan and you wanted to ensure that the applicant had more than sufficient cash flow to pay off its existing debt,the applicant's cash-flow-to-debt ratio would have to be greater than

As a business lender,you would prefer that the borrower have stable or growing cash flows resulting from which part of the statement of cash flows?

Based on an option valuation method,the EDF model:

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

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 fixed asset efficiency score is which is that of the typical firm in the industry.