Question 1

Bankers Acceptances are used in international trade mainly because...

Accepted Answer

A) they are a cheap source of financing 
B) they always pay in local currency so there is no currency risk 
C) they help solve informational asymmetry problem between the trading parties 
D) they allow banks to earn a high profit 
E) they are long-term borrowings 
A) they are a cheap source of financing 
B) they always pay in local currency so there is no currency risk 
C) they help solve informational asymmetry problem between the trading parties 
D) they allow banks to earn a high profit 
E) they are long-term borrowings C

Question 2

Risk processing involves

Accepted Answer

A) pre-lending screening 
B) post-lending monitoring 
C) loan workouts to control credit risk 
D) all of the above 
E) b and c only 
A) pre-lending screening 
B) post-lending monitoring 
C) loan workouts to control credit risk 
D) all of the above 
E) b and c only E

Question 3

Which of the following statements is are false?

Accepted Answer

A) A transaction loan is negotiated for a specific purpose. 
B) A transaction loan is usually done frequently. 
C) A transaction loan is normally secured by an asset. 
D) The repayment comes from the use of the asset pledged as collateral 
E) All of the above 
A) A transaction loan is negotiated for a specific purpose. 
B) A transaction loan is usually done frequently. 
C) A transaction loan is normally secured by an asset. 
D) The repayment comes from the use of the asset pledged as collateral 
E) All of the above B

Question 4

A borrower's capital is an important factor in credit analysis because...

Accepted Answer

A) higher amount of capital mitigates moral hazard problems 
B) higher amount of capital signals the borrower's confidence about its future cash flows 
C) the greater is the amount of capital, the greater is the borrower's loss if it decides to take on riskier projects 
D) all of the above 
E) b and c only 
A) higher amount of capital mitigates moral hazard problems 
B) higher amount of capital signals the borrower's confidence about its future cash flows 
C) the greater is the amount of capital, the greater is the borrower's loss if it decides to take on riskier projects 
D) all of the above 
E) b and c only

Question 5

Use the following information for questions 
You are evaluating a loan request of $2.5 million from Dubious Corp.The firm has an existing debt repayment obligation of $5 million.It has $2.6 million of equity.The firm has two projects, A and B.An investment in A will yield a payoff of $5 million with probability
0.8 and $2.5 million with probability 0.2.Project B will yield a payoff of $8 million with probability 0.4 and zero with probability 0.6.The firm has assets-in-place that generates $6 million with probability 0.8 and zero with probability 0.2.Assume that the distributions of payoff from projects A and B are common knowledge, and the payoff from A is statistically independent of the payoff from B.However, as a bank lending officer, you cannot observe the firm's project choice.
-Suppose the firm has the $2.6 million equity and you assume that project A will be chosen.What interest rate will you charge in order to break-even?

Accepted Answer

A) 3% 
B) 4% 
C) 8.5% 
D) 10% 
E) 12.4% 
A) 3% 
B) 4% 
C) 8.5% 
D) 10% 
E) 12.4%

Question 6

A short-term, unsecured borrowing that is backed by the issuer's credit strength is...

Accepted Answer

A) Bankers Acceptance 
B) Commercial Paper 
C) Repurchase Agreement 
D) Federal Funds 
E) Eurodollars 
A) Bankers Acceptance 
B) Commercial Paper 
C) Repurchase Agreement 
D) Federal Funds 
E) Eurodollars

Question 7

The reason why character is an important consideration in a loan request is that...

Accepted Answer

A) a good borrower always chooses a higher interest rate to distinguish itself from a bad one 
B) a good borrower always chooses a lower interest rate to distinguish itself from a bad one 
C) a borrower's credit reputation is a good indication of its incentive to default 
D) a good borrower has more collateral to pledge 
E) all of the above 
A) a good borrower always chooses a higher interest rate to distinguish itself from a bad one 
B) a good borrower always chooses a lower interest rate to distinguish itself from a bad one 
C) a borrower's credit reputation is a good indication of its incentive to default 
D) a good borrower has more collateral to pledge 
E) all of the above

Question 8

Use the following information for questions 
National Cleaner Corp.needs a $1.5 million loan to finance a project that pays off next period.There are two projects available, A and B.You are a lending officer and know about the projects but cannot control the borrower's project choice.A will yield a payoff of $6.75 million with probability 0.6 or zero with probability 0.4.B will pay off $8 million with probability 0.5 or zero with probability 0.5.Everybody is risk neutral and the riskless interest rate is 10%.You consider designing a loan contract that involves the use of collateral However, collateral is costly and $1 of the borrower's collateral is worth only 90 cents to your bank.
-Suppose you assume that A will be chosen, and offer an unsecured loan.What project will the firm choose and what is the interest rate?

Accepted Answer

A) Project A with net expected payoff $6.75 million, interest rate 10% 
B) Project A with net expected payoff $2.4 million, interest rate 83.33% 
C) Project A with net expected payoff $2.25 million, interest rate 57% 
D) Project B with net expected payoff $2.625 million, interest rate 83.33% 
E) Project B with net expected payoff $4 million, interest rate 57% 
A) Project A with net expected payoff $6.75 million, interest rate 10% 
B) Project A with net expected payoff $2.4 million, interest rate 83.33% 
C) Project A with net expected payoff $2.25 million, interest rate 57% 
D) Project B with net expected payoff $2.625 million, interest rate 83.33% 
E) Project B with net expected payoff $4 million, interest rate 57%

Question 9

The main reasons) for the declining importance of the commercial and industrial loans relative to mortgage loans is

Accepted Answer

A) the competition from the venture capitalists 
B) the S&L crisis which resulted in the reduction of mortgage lending of the remaining S&Ls 
C) the bank's competitive advantage in solving private information problem has diminished 
D) both a and b 
E) all of the above 
A) the competition from the venture capitalists 
B) the S&L crisis which resulted in the reduction of mortgage lending of the remaining S&Ls 
C) the bank's competitive advantage in solving private information problem has diminished 
D) both a and b 
E) all of the above

Question 10

To comply with affirmative covenants,

Accepted Answer

A) a borrower must not discriminate less risky projects from more risky ones 
B) a lender must not discriminate borrowers based on race 
C) a borrower is required to furnish the lender with periodic financial statements 
D) a lender must charge all borrowers the same interest rate 
E) all of the above 
A) a borrower must not discriminate less risky projects from more risky ones 
B) a lender must not discriminate borrowers based on race 
C) a borrower is required to furnish the lender with periodic financial statements 
D) a lender must charge all borrowers the same interest rate 
E) all of the above

Question 11

Use the following information for questions 
National Cleaner Corp.needs a $1.5 million loan to finance a project that pays off next period.There are two projects available, A and B.You are a lending officer and know about the projects but cannot control the borrower's project choice.A will yield a payoff of $6.75 million with probability 0.6 or zero with probability 0.4.B will pay off $8 million with probability 0.5 or zero with probability 0.5.Everybody is risk neutral and the riskless interest rate is 10%.You consider designing a loan contract that involves the use of collateral However, collateral is costly and $1 of the borrower's collateral is worth only 90 cents to your bank.
-What is the interest rate for the secured loan?

Accepted Answer

A) 120% 
B) 83.33% 
C) 57.33% 
D) 27.08% 
E) 15.75% 
A) 120% 
B) 83.33% 
C) 57.33% 
D) 27.08% 
E) 15.75%

Question 12

Moral hazard problem associated with bank lending stems from

Accepted Answer

A) the borrower's private attributes which are unknown to the bank at the time of the loan application 
B) the bank's inability to screen the borrower to determine its creditworthiness 
C) the borrower's desire to take on riskier projects after obtaining the loan 
D) all of the above 
E) b and c only 
A) the borrower's private attributes which are unknown to the bank at the time of the loan application 
B) the bank's inability to screen the borrower to determine its creditworthiness 
C) the borrower's desire to take on riskier projects after obtaining the loan 
D) all of the above 
E) b and c only

Question 13

Use the following information for questions 
You are evaluating a loan request of $2.5 million from Dubious Corp.The firm has an existing debt repayment obligation of $5 million.It has $2.6 million of equity.The firm has two projects, A and B.An investment in A will yield a payoff of $5 million with probability
0.8 and $2.5 million with probability 0.2.Project B will yield a payoff of $8 million with probability 0.4 and zero with probability 0.6.The firm has assets-in-place that generates $6 million with probability 0.8 and zero with probability 0.2.Assume that the distributions of payoff from projects A and B are common knowledge, and the payoff from A is statistically independent of the payoff from B.However, as a bank lending officer, you cannot observe the firm's project choice.
-Suppose that the firm doesn't have equity capital.As a lending officer, what is the repayment obligation that you require to break-even, assuming that project A will be undertaken?

Accepted Answer

A) $2.5 million 
B) $2.6 million 
C) $3.125 million 
D) $3.765 million 
E) $4.125 million 
A) $2.5 million 
B) $2.6 million 
C) $3.125 million 
D) $3.765 million 
E) $4.125 million

Question 14

A loan covenant stipulates

Accepted Answer

A) that a borrower has filed all necessary tax returns before applying for a loan 
B) certain minimum standards that a borrower must maintain to avoid a state of default 
C) that a borrower must have a cosigner 
D) all of the above 
E) a and b only 
A) that a borrower has filed all necessary tax returns before applying for a loan 
B) certain minimum standards that a borrower must maintain to avoid a state of default 
C) that a borrower must have a cosigner 
D) all of the above 
E) a and b only

Question 15

In credit card lending, the bank makes profits from

Accepted Answer

A) the discount at which the sales slips are sold to the merchants 
B) the interest rate charged to the credit cardholders with outstanding balances 
C) the annual fees that may be charged by the banks 
D) all of the above 
E) both b and c 
A) the discount at which the sales slips are sold to the merchants 
B) the interest rate charged to the credit cardholders with outstanding balances 
C) the annual fees that may be charged by the banks 
D) all of the above 
E) both b and c

Question 16

In analyzing a loan application, a borrower's financial capability refers to...

Accepted Answer

A) capital 
B) capacity 
C) character 
D) collateral 
E) Conditions 
A) capital 
B) capacity 
C) character 
D) collateral 
E) Conditions

Question 17

The "conditions precedent" in a loan agreement means

Accepted Answer

A) that a borrower must repay the loan before the due date 
B) that a borrower must satisfy certain requirements before the loan is funded 
C) that a bank can waive certain loan stipulations when the borrower has not defaulted 
D) both a and b 
E) both a and c 
A) that a borrower must repay the loan before the due date 
B) that a borrower must satisfy certain requirements before the loan is funded 
C) that a bank can waive certain loan stipulations when the borrower has not defaulted 
D) both a and b 
E) both a and c

Question 18

The following is an example of restrictive clauses:

Accepted Answer

A) a borrower must maintain certain level of working capital 
B) a borrower cannot pay excessive amount of dividends 
C) a borrower must invest in specific type of fixed investments 
D) a and b only 
E) b and c only 
A) a borrower must maintain certain level of working capital 
B) a borrower cannot pay excessive amount of dividends 
C) a borrower must invest in specific type of fixed investments 
D) a and b only 
E) b and c only

Question 19

When a bank originates a loan, it

Accepted Answer

A) initiates a contact with a borrower 
B) conducts a credit analysis to determine the borrower's creditworthiness 
C) designs the loan contract 
D) collects the payments 
E) a, b, and c only 
A) initiates a contact with a borrower 
B) conducts a credit analysis to determine the borrower's creditworthiness 
C) designs the loan contract 
D) collects the payments 
E) a, b, and c only

Question 20

A loan commitment is

Accepted Answer

A) a promise by the borrower to obtain a loan from a particular bank of his choice 
B) a promise by the bank to lend in the future on a prespecified term. 
C) an agreement that entitles the bank to change the interest rate on loan based on the prevailing market condition 
D) the same as spot lending 
E) all of the above 
A) a promise by the borrower to obtain a loan from a particular bank of his choice 
B) a promise by the bank to lend in the future on a prespecified term. 
C) an agreement that entitles the bank to change the interest rate on loan based on the prevailing market condition 
D) the same as spot lending 
E) all of the above

Bankers Acceptances are used in international trade mainly because...

Risk processing involves

Which of the following statements is are false?

A borrower's capital is an important factor in credit analysis because...

A short-term, unsecured borrowing that is backed by the issuer's credit strength is...

The reason why character is an important consideration in a loan request is that...

The main reasons) for the declining importance of the commercial and industrial loans relative to mortgage loans is

To comply with affirmative covenants,

Moral hazard problem associated with bank lending stems from

A loan covenant stipulates

In credit card lending, the bank makes profits from

In analyzing a loan application, a borrower's financial capability refers to...

The "conditions precedent" in a loan agreement means

The following is an example of restrictive clauses:

When a bank originates a loan, it

A loan commitment is

Basic Concepts

The Nature and Variety of Financial Intermediation

The What, How, and Why of Financial Intermediaries

Major Risks Faced by Banks

Interest Rate Risk

Liquidity Risk

Further Issues in Bank Lending

Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance

Off-Balance Sheet Banking and Contingent Claims Products

Securitization

The Deposit Contract, Deposit Insurance, and Shadow Banking

Capital Structure

The 200709 Financial Crisis and Other Financial Crises

Objectives of Bank Regulation

Major Milestones in Banking Legislation and Regulatory Reform

The Evolution of Banks and Markets and the Role of Financial Innovation

The Future

Filters

Exam 7: Spot Lending and Credit Risk

Bankers Acceptances are used in international trade mainly because...

Risk processing involves

Which of the following statements is are false?

A borrower's capital is an important factor in credit analysis because...

A short-term, unsecured borrowing that is backed by the issuer's credit strength is...

The reason why character is an important consideration in a loan request is that...

The main reasons) for the declining importance of the commercial and industrial loans relative to mortgage loans is

To comply with affirmative covenants,

Moral hazard problem associated with bank lending stems from

A loan covenant stipulates

In credit card lending, the bank makes profits from

In analyzing a loan application, a borrower's financial capability refers to...

The "conditions precedent" in a loan agreement means

The following is an example of restrictive clauses:

When a bank originates a loan, it

A loan commitment is

Basic Concepts

The Nature and Variety of Financial Intermediation

The What, How, and Why of Financial Intermediaries

Major Risks Faced by Banks

Interest Rate Risk

Liquidity Risk

Further Issues in Bank Lending

Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance

Off-Balance Sheet Banking and Contingent Claims Products

Securitization

The Deposit Contract, Deposit Insurance, and Shadow Banking

Capital Structure

The 200709 Financial Crisis and Other Financial Crises

Objectives of Bank Regulation

Major Milestones in Banking Legislation and Regulatory Reform

The Evolution of Banks and Markets and the Role of Financial Innovation

The Future

Filters