79. Short-term lending to support the construction of homes, apartments, office buildings, shopping centers, and other permanent structures is known as a (or an):
C) Interim construction loan
80. Business loans designed to fund long- and medium-term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period longer than one year are known as:
B) Term loans
81. A loan whose principal is not due to be paid back until the loan's term ends and in which only interest is paid periodically during the life of the loan is called a (or an):
C) Bullet loan
82. A credit agreement in which a business customer may borrow up to a pre-specified limit, repay all or a portion of the borrowing, and reborrow as necessary until the credit line matures is known as a (an):
D) Revolving line of credit
83. When analyzing a commercial loan credit request, which of the following statements is (are) correct?
A) The lender should evaluate the potential income available to service the loan.
B) The lender should evaluate the potential cash flow available to service the loan.
C) The lender should be certain that the loan is adequate to meet the needs of the borro
84. Banks oftentimes bid on the opportunity to finance the entire inventory of an automobile dealer through a ___________ arrangement.
B) Floorplanning
85. The most common sources that lenders look to for repayment of business loans include all of the following except:
C) Relatives of the borrowe.
86. When analyzing the financial statements of a business, a credit analyst will look for ratios in which of the following categories:
A) Profitability.
B) Coverage
C) Efficiency
D) Liquidity
E) All of the above are categories of ratios bankers will look for
Answer: E
87. Recent federal guidelines put in place by the Federal Deposit Insurance Corporation require banks to develop written procedures to protect against loss from environmental damage. These procedures are known as the:
B) Environmental Risk Assessment Program
88. Term loans normally are secured by:
A) Fixed assets
89. Under court interpretation of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 lenders may be liable for clean-up costs of hazardous substances if:
A) The lender in involved in managing property with hazardous wastes
B) The lender has a strong association with the property owner
C) The lender has managed its customer's firms and there are toxic wastes involved
D) All of the above
E) None of the above
90. A bank that wants to examine the operating efficiency of a borrower would most likely examine which of the following ratios?
A) Cost of Goods Sold/ Average Inventory
91. A bank that wants to examine the liquidity of a borrower would most likely examine which of the following ratios?
D) Current Assets/ Current Liabilities
92. A bank wants to examine whether the borrower can raise cash in a timely fashion to pay bills that are coming due. This bank would most likely examine which of the following categories of ratios?
B) Customer's Liquidity
93. A government security dealer requires credit to add new government securities to his security portfolio. What type of loan is this?
C) Security dealer financing
94. Credit is extended to a company up to one year to purchase raw materials and cover a seasonal peak need for cash. What type of loan is this?
B) Working capital loan
95. The term of an inventory loan is being set to match the exact length of time needed to generate sufficient cash to repay the loan. What type of loan is this?
A) Self-liquidating inventory loan
96. A business receives a three year line of credit against which it can borrow, repay and borrow again if necessary during the loan's three year term. What type of loan is this?
D) Revolving line of credit
97. A loan or line of credit extended to a business by a group of lending institutions in order to reduce the risk exposure is known as:
D) A syndicated loan
98. A bank that is examining the ratio of total liabilities to total assets is examining which category of ratios?
E) Leverage Measures
99. A bank that is examining the ratio of costs of goods sold to inventory is examining which category of ratios?
B) Operating Efficiency Measures
100. A bank that is examining the ratio of overhead expenses to net sales is examining which category of ratios?
A) Expense Control Measures
101. Which dimension of a business firm's financial and operating performance would unfunded pension liabilities fit best?
C) Contingent liability
102. Which dimension of a business firm's financial and operating performance would the percentage change in the firm's stock price fit best?
B) Market indicator
103. Which dimension of a business firm's financial and operating performance would the gross profit margin fit best?
D) Marketability of the product or service
104. According to the cost-plus model for pricing loans, factors that should be considered in pricing a loan include:
A) The marginal cost of raising loanable funds to support the loan request
B) Nonfunds operating costs
C) An appropriate margin to compensate the bank for default risk.
D) The bank's desired profit margin
E) All of the above
Answer: E
105. The business loan pricing method that includes the nonfunds operating costs of making a loan plus the bank's desired profit margin is:
A) The Cost-Plus Loan-Pricing Method
106. The business loan pricing method that estimates the total revenues a loan will generate, the net amount of loanable funds the bank must turn over to the borrower, and the before-tax yield expected from the loan is the:
D) Customer Profitability Analysis
107. Suppose a business borrower is quoted a loan rate of two percentage points above the prevailing prime interest rate posted by leading U.S. banks. This is an example of the:
D) Prime-plus pricing method.
108. The method of pricing a business loan that contends that a bank should take the whole customer relationship into account when pricing each loan request is the:
D) Customer Profitability Analysis
109. The business loan pricing method that bases a loan rate on a relatively low money market interest rate (such as the federal funds rate) plus a small margin to cover risk exposure, other operating costs, and a profit margin is known as the:
B) Below Prime Rate Pricing Model
110. Which of the following is a strength of the cost-plus loan pricing method?
C) It considers the cost of loanable funds and the operating costs of running the bank
111. Which of the following is a weakness of the price leadership loan pricing method?
A) It does not consider the marginal cost of raising funds
112. Which of the following is a strength of the markup (or below prime market) loan pricing method?
B) It allows the bank to compete more aggressively with the commercial paper market
113. Which of the following is a weakness of the cost-plus loan pricing method?
A) It does not consider the marginal cost of raising funds
B) It does not give much regard for the competition from other lenders
C) The bank must know what their costs are in order to make correctly price loans
D) B and C above
E) All of the above
Answer
114. Which of the following is a strength of the price leadership loan pricing method?
A) It considers the competition from other lenders
115. Which of the following is a strength of the customer profitability analysis method for pricing loans?
D) It takes the whole customer relationship into account
116. The business loan pricing method which starts with a base rate such as the bank's prime rate and adds a markup for default and term risk is known as:
B) The Price Leadership Model
117. A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds costs to the bank are .5 percent. It has also determined that its margin to compensate the bank for default risk for a particular customer is .30 perce
D) $560,000
118. A bank has determined that its marginal cost of raising funds is 4.5 percent and that its nonfunds costs to the bank are .5 percent. It has also determined that its margin to compensate the bank for default risk for a particular customer is .30 perce
A) The Cost-Plus Loan-Pricing Method
119. A bank has a prime rate of 6 percent for its best customers. It has determined that the default risk premium for a particular customer is .4% and the term-risk premium for this loan is .25 percent. If this customer wants to borrow $5.0 million from t
A) $332,500
122. SNCs are also known as:
C) Syndicated loans
123. Small business lending by banks is
A) Declining
124. The most common type of loan foreign banks make in the U.S. are:
A) Commercial loans
125. Which of the following is an example of a captive finance company?
B) GMAC
126. Lloyd Blenman is building a shopping center in Charlotte and needs to get a loan until the shopping center is finished and he can get a mortgage on the property. What type of loan does he need?
C) Interim construction financing
127. Dick Dowen needs a loan to buy plants and fertilizer for his nursery for the spring planting season. This loan will automatically be paid off as the plants and fertilizer are sold to his customers. What type of loan does Dick need?
A) Self-liquidating inventory loan
128. Randal Ice needs a loan to purchase pet food and other pet supplies for his local pet store over the next six months. He has estimated that the maximum amount of inventory he will need in the next six months is $200,000 and he knows that he will have
B) Working capital loan
129. Barbara Miller is a small dealer who specializes in healthcare stocks. She needs a loan so that she can sustain her portfolio of stocks until customer buy orders catch up with what she has already purchased from the market. She only expects to need t
D) Security dealer financing
130. Sight n' Sound is a retail store that sells refrigerators, washers, dryers and other consumer appliances. They need a loan so they can place an order with Whirlpool. The appliances will be the collateral for the loan and as an appliance is sold, the
E) Retailer and equipment financing
131. Mary Williams needs to purchase a new bulldozer and excavator for her construction business and wants to repay the loan over the next three years in regularly scheduled payments. What type of loan does Mary need?
A) Term business loan
132. The Ford Motor Company needs to borrow $50 million. The First National Bank creates a packaged loan with several other banks to lend to Ford Motor Company. This loan package can be sold on the secondary market and carries a rate that is 500 basis poi
E) Syndicated loan
133. The Wabash Washing Machine Company has arranged to get a loan from their bank over the next five years. They can borrow up to a pre-specified limit and repay it as many times as they need until the loan matures. The Wabash Washing Machine Company has
B) Revolving credit financing
134. The Jung Company and the Nguyen Company have combined to build a new container ship docking facility in Charleston Harbor. The facility is expected to take two years to complete and cost $3 billion to construct. These companies want to borrow money i
C) Long term project loan
135. The management of the Frickel Frontier Freight Company wants to take the company private by borrowing money and using the proceeds of the loan to purchase the shares of the company in the market. Management believes they can increase revenues enough
D) LBO loan
136. A bank wants to examine how well customer controls their expenses. They are most likely to look at which of the following ratios?
A) Wages and Salaries/Net Sales
137. A bank wants to examine how well a customer uses assets to generate sales. They are most likely to look at which of the following ratios?
B) Accounts Receivables/(Annual credit sales/360)
138. A bank wants to examine how well a customer markets their goods and services. They are most likely to look at which of the following ratios?
C) Net income after taxes/Net Sales
139. A bank wants to examine the adequacy of a business customer's earnings based on the coverage ratios. They are most likely to look at which of the following ratios?
D) Income before interest and taxes/Interest payments
140. A bank wants to know whether a customer can raise cash in a timely fashion at a reasonable cost. They are mostly likely to look at which of the following ratios?
E) (Current assets - Inventory)/Current liabilities
141. A bank has a concern about the Wilson Company's debt level. They feel that it is too high. What ratio are they most likely to examine to answer this question?
E) Long term debt/(Long term debt + Net worth)
142. A bank has a concern because they feel that a firm has an excessive amount of assets. They do not feel that the firm is efficient in generating sales from their current level of assets. What ratio are they most likely to examine to answer this questi
B) Net sales/Total assets
143. A bank feels that a firm has expenses that are too high. What ratio are they most likely to examine to address this concern?
A) Selling and administrative expenses/Net sales
144. A bank is concerned because they feel that a firm will not be able to raise enough cash to pay bills that are due within the next year. What ratio are they most likely to examine to address this concern?
C) Current assets-Current liabilities
145. A bank wants to examine the financial success of a company by examining the profits of a company. What ratio will help the bank examine this issue?
D) Net income/Total assets
146. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition t
A) 10.00%
147. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition t
B) 45 days
148. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition t
D) $2000
149. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition t
C) 50.00%
150. A firm submits their financial records to a bank. Upon examination, the bank discovers that this firm has $500 in cash, $2500 in accounts receivables, $1000 in inventory, $5000 in plant and equipment and that their assets totaled $9000. In addition t
E) 1.50
151. Banks need to be able to compare the firm they are examining to its industry. One company that provides information to banks about the industries their customers are in is:
C) Dun and Bradstreet
152. A firm has net sales of $25,000, costs of goods sold of $10,000, selling, general and administrative expenses of $8000 (of which $2000 are depreciation expenses) and taxes (in cash) of $3000. What is this firm's operating cash flow (using the traditi
C) $5,000
153. A bank wants to estimate a firm's future financial condition. Which of the following is something that allows a bank to do this?
B) Pro forma statement
154. A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%. They have also estimated that the term risk premium is .5%
A) 8.5%
155. A bank has a listed prime rate of 7%. They have estimated that the marginal cost of raising funds is 5%, their default risk premium on a loan is 1.5% and that they want a profit margin of 2%. They have also estimated that the term risk premium is .5%
B) 9%