Deck 13: Overview of Credit Policy and Loan Characteristics

Question 1

In the credit process, which of the following activities falls under Credit Execution and Administration?

A) Financial statement analysis
B) Evaluate collateral
C) Officer call programs
D) Review loan documentation
E) Monitor compliance with loan agreement

Answer 1

A

Question 2

To be classified as a non-current loan, payments must be past due a minimum of how many days?

A) 30 days
B) 60 days
C) 90 days
D) 120 days
E) 158 days

Answer 2

C

Question 3

Which of the following refers to a lender's tendency to ignore circumstances in which a loan might default?

A) Complacency
B) Contention
C) Contingencies
D) Competition
E) Carelessness

Answer 3

C

Question 4

Which of the following formalizes a bank's lending guidelines?

A) Loan policy
B) Credit culture
C) Credit analysis
D) Credit review
E) Loan documentation

Question 5

Widespread use of credit scoring:

A) standardizes the perceived quality of different loan types.
B) decreases the supply of credit.
C) increases market interest rates.
D) reduces the costs of the associated loans.
E) all of the above.

Question 6

The highest ROA and charge-off rates in 2012 were reported by:

A) agricultural banks.
B) credit card banks.
C) commercial lenders.
D) consumer lenders.
E) international banks.

Question 7

A security interest in a loan is said to be perfected if the:

A) bank holds the collateral.
B) loan has no protective covenants.
C) borrower is a low credit risk.
D) government guarantees the loan.
E) bank has never lent to the customer before.

Question 8

In the credit process, which of the following activities falls under Credit Review?

A) Loan committee reviews
B) Perfecting the security interest
C) Market research
D) Review loan documentation
E) Market research

Question 9

Which of the following is not one of the five Cs of bad credit?

A) Complacency
B) Contention
C) Contingencies
D) Competition
E) Carelessness

Question 10

The ability to repay a loan is measured by a firm's:

A) capacity.
B) collateral.
C) character.
D) capital.
E) credit.

Question 11

Large firms can obtain funds from which of the following?

A) Equity financing
B) Issuing commercial paper
C) Issuing long-term bonds
D) Loans from commercial banks
E) All of the above

Question 12

The vast majority of FDIC-insured institutions are classified as:

A) credit card banks.
B) agricultural banks.
C) consumer lenders.
D) commercial lenders.
E) mortgage lenders.

Question 13

In the credit process, which of the following activities falls under Business Development and Credit Analysis?

A) Loan committee reviews
B) Loan documentation review
C) Officer call programs
D) Perfect security interest
E) Process loan payments

Question 14

The lender's secondary source of repayment in case of default is:

A) capacity.
B) collateral.
C) character.
D) capital.
E) credit.

Question 15

Which of the following refers to the principles that drive a bank's lending activity?

A) Loan policy
B) Credit culture
C) Credit analysis
D) Credit review
E) Loan documentation

Question 16

Which of the following is the primary emphasis of a values-driven credit culture?

A) Annual bank profit
B) Bank soundness and stability
C) Loan volume
D) Loan growth
E) Short-term earnings

Question 17

The largest single loan category for all banks is:

A) real estate loans.
B) commercial loans.
C) credit card loans.
D) industrial loans.
E) agricultural loans.

Question 18

When a bank lends in a narrow geographic area, they are subject to:

A) country risk.
B) concentrated risk.
C) historical risk.
D) charge-off risk.
E) portfolio risk.

Question 19

The risk of potential loss of interest and principal on international loans due to borrowers in a country refusing to make timely payments, as per the loan agreement is known as what type of risk?

A) International risk
B) Foreign risk
C) Continent risk
D) Country risk
E) Government risk

Question 20

Which of the following is not one of the five Cs of (good) credit?

A) Character
B) Collateral
C) Capital
D) Capacity.
E) Communication

Question 21

Asset based loans:

A) are not generally tied to inventory.
B) include loans to finance leveraged buyouts.
C) put more weight on cash flow than collateral when evaluating the loan.
D) All of the above.
E) None of the above.

Question 22

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&10 \\\text {Days cash }& 7\\\text {Days inventory }& 33\\\text {Days accounts payables }& 21\\\text {Days accounts receivables }&35 \\\\\text { Average Daily COGS }&\$15\end{array}$


-What are the firm's estimated working capital needs?

A) $90
B) $315
C) $660
D) $1,125
E) $2,250

Question 23

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&11 \\\text {Days cash }& 5\\\text {Days inventory }& 29\\\text {Days accounts payables }& 19\\\text {Days accounts receivables }&31 \\\\\text { Average Daily COGS }&\$18\end{array}$


-What is the firm's cash-to-cash asset cycle?

A) 30 days
B) 59 days
C) 65 days
D) 95 days
E) 113 days

Question 24

Banks rarely provide:

A) start-up capital loans.
B) mortgage loans.
C) automobile loans.
D) agricultural loans..
E) commercial loans.

Question 25

_______________________ represents the amount of long-term financing required for current assets.

A) Permanent working capital
B) Seasonal working capital
C) Secondary working capital
D) Perpetual working capital
E) Passive working capital

Question 26

Which of the following would be considered an interim loan?

A) Automobile loan
B) Residential mortgage loan
C) Construction loan
D) Home equity loan
E) Student loan

Question 27

Which of the following would be considered a "positive" loan covenant?

A) Days receivables outstanding cannot exceed 30 days
B) No change in senior management
C) Capital outlays cannot exceed $1,000,000 per year
D) No additional liens may be placed on the collateral
E) The bank must approve any firm mergers or acquisitions

Question 28

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&11 \\\text {Days cash }& 5\\\text {Days inventory }& 29\\\text {Days accounts payables }& 19\\\text {Days accounts receivables }&31 \\\\\text { Average Daily COGS }&\$18\end{array}$


-What is the firm's liability cycle?

A) 30 days
B) 59 days
C) 65 days
D) 95 days
E) 113 days

Question 29

Loans that finance the construction of roads and public utilities in new subdivisions are labeled:

A) public work loans.
B) take-out loans.
C) domestic loans.
D) land development loans.
E) working capital loans.

Question 30

Venture capital financing that comes in the "later rounds" of financing may take the form of:

A) start-up capital loans.
B) mezzanine financing.
C) automobile financing.
D) seed money.
E) staff financing.

Question 31

Loan covenants:

A) protect the borrower from lender interference in management.
B) are limited to "negative" provisions.
C) may limit discretionary cash outlays by firms.
D) are seldom enforced.
E) often result in the lender's bankruptcy.

Question 32

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&11 \\\text {Days cash }& 5\\\text {Days inventory }& 29\\\text {Days accounts payables }& 19\\\text {Days accounts receivables }&31 \\\\\text { Average Daily COGS }&\$18\end{array}$


-What are the firm's estimated working capital needs?

A) $90
B) $540
C) $630
D) $1,170
E) $2,034

Question 33

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&10 \\\text {Days cash }& 7\\\text {Days inventory }& 33\\\text {Days accounts payables }& 21\\\text {Days accounts receivables }&35 \\\\\text { Average Daily COGS }&\$15\end{array}$


-A loan where the entire principal is due at maturity is called a:

A) installment loan.
B) sinking fund loan.
C) mezzanine loan.
D) bullet loan.
E) highly leverage transaction loan.

Question 34

Which of the following would be considered a "negative" loan covenant?

A) The firm's current ratio cannot fall below 2.0
B) All property must be maintained in good condition
C) The firm's net worth must exceed $10,000,000
D) The firm must carry property insurance on all collateral.
E) Cash dividends cannot exceed 50% of earnings.

Question 35

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&10 \\\text {Days cash }& 7\\\text {Days inventory }& 33\\\text {Days accounts payables }& 21\\\text {Days accounts receivables }&35 \\\\\text { Average Daily COGS }&\$15\end{array}$


-What is the firm's cash-to-cash asset cycle?

A) 31 days
B) 44 days
C) 65 days
D) 75 days
E) 121 days

Question 36

Use the following firm working capital cycle information for questions
$\begin{array}{ll}\text { Days accruals}&10 \\\text {Days cash }& 7\\\text {Days inventory }& 33\\\text {Days accounts payables }& 21\\\text {Days accounts receivables }&35 \\\\\text { Average Daily COGS }&\$15\end{array}$


-What is the firm's liability cycle?

A) 21 days
B) 31 days
C) 65 days
D) 75 days
E) 121 days

Question 37

When a bank's claim to collateral is superior to all other creditors, the claim is said to be:

A) developed.
B) guaranteed.
C) certified.
D) perfected.
E) endorsed.

Question 38

All of the following are loan classifications under the Uniform Bank Performance Report except:

A) real estate loans.
B) automobile loans.
C) individual loans.
D) commercial loans.
E) agricultural loans.

Question 39

Positive working capital for a firm implies:

A) the firm has no short-term debt.
B) the firm has no seasonal cash flow needs.
C) that current assets are completely financed by current liabilities.
D) the firm has no long-term debt.
E) that current assets are partially financed by long-term debt and equity.

Question 40

A _______________________ is a post office box number controlled by the bank.

A) syndication
B) local
C) lockbox
D) maintenance box
E) microhedge

Question 41

As more lenders securitize loans, the supply of credit falls.

Question 42

Explain why credit quality data may not accurately reflect the quality of individual assets and the likelihood of default.

Question 43

The primary focus of a values driven bank is on the bank's annual profit plan.

Question 44

How does a firm's seasonal working capital needs differ from its permanent working capital needs?

Question 45

The largest banks have, on average, reduced their dependence on loans relative to smaller banks.

Question 46

All leveraged buyouts (LBOs) are labeled highly leveraged transactions.

Question 47

Discuss the five Cs of good credit and the five Cs of bad credit

Question 48

National banks can directly take equity positions in real estate projects.

Question 49

Real estate lending is popular with bank, in part, due to the growth of the secondary mortgage market.

Question 50

The Internet has led to larger spreads for more standardized loan products.

Question 51

Loans that are seasonal in nature should be self-liquidating.

Question 52

Discuss the role of a loan committee and a centralized underwriting department in credit making decisions.

Question 53

The most prominent risk banks assume in making loans is interest rate risk.

Question 54

The quality of bank loans varies with the business cycle.

Question 55

What are the major differences between a values-driven credit culture and a market-share driven credit culture?