Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 1
1. Personal loans do not require the borrower to state a specific purpose for the funds.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
2. Secured loans are sometimes called signature loans.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
3. Balance sheets for all banks are private documents seen only by bank management.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.3 – LO: 7.1.3
4. The three general categories of loans are consumer loans, commercial loans, and mortgage loans.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.1 – LO: 7.1.1
5. Subprime rates are higher-than-normal interest rates offered to a less-than-perfect credit applicant.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.1 – LO: 7.3.1
6. If a credit applicant has opened many new accounts recently, that is probably a sign that the applicant is very
creditworthy.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.2 – LO: 7.3.2
7. Paying off a loan early saves the consumer no money if the sum-of-digits method has been used to compute finance
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 2
charges.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
8. One consequence of credit overextension is a ruined credit rating.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.2 – LO: 7.4.2
9. High consumer debt is good for banks, because banks make most of their money from the interest paid on loans.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.2 – LO: 7.4.2
10. The term moral hazard means that consumers with poor moral character are a high credit risk.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.2 – LO: 7.1.2
11. Keeping large amounts of currency on hand as protection against possible increases in customers’ demand for
withdrawals reduces a bank’s ability to make profits from loans.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.5.1 – LO: 7.5.1
12. A lending policy is a written statement of the guidelines and standards a bank must follow in making credit decisions.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.5.2 – LO: 7.5.2
13. All of the following are considered installment loans except
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 3
a.
automobile loans.
b.
home equity loans.
c.
education loans.
d.
lines of credit.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
14. A legal claim a lender has on property to secure a debt is called
a.
a lien.
b.
collateral.
c.
an acceleration clause.
d.
a garnishment.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
15. Which of the following is NOT an example of an account service fee?
a.
certified check fee
b.
fee for returned checks
c.
financing fee
d.
verbal funds transfer fee
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.3 – LO: 7.1.3
16. Which of the following statements about open-end loans is true?
a.
An automobile loan is probably the most common type of open-end loan.
b.
The longer you use the money, the more you pay.
c.
The amount owed is fixed.
d.
The term is fixed.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.2 – LO: 7.2.2
17. Which of the following shows the steps of the credit-approval process in proper order?
a.
underwriting, application, documentation, processing, closing, funding
b.
documentation, application, underwriting, closing, processing, funding
c.
application, processing, documentation, underwriting, closing, funding
d.
application, documentation, processing, underwriting, closing, funding
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.1 – LO: 7.3.1
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 4
18. Which of the following elements of the FICO credit-scoring system carries the most weight?
a.
types of credit
b.
payment history
c.
length of credit history
d.
new credit
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.2 – LO: 7.3.2
19. This finance charge method takes the total finance charge, divides it by the number of months in the loan term, and
assigns a higher ratio of interest to the early payments.
a.
previous balance method
b.
average daily balance method
c.
sum-of-digits method
d.
adjusted balance method
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
20. Documentation of most credit problems stays in a consumer’s file for at least
a.
six months.
b.
one year.
c.
five years.
d.
seven years.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.2 – LO: 7.4.2
21. The concept that the borrowers who are most willing to accept a high interest rate are the same borrowers who are
most likely to default on their loans is called
a.
moral hazard.
b.
captive borrowers.
c.
adverse selection.
d.
asset transformation.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.2 – LO: 7.1.2
22. The risk that a bank will have to sell its assets at a loss to meet its cash demands is called
a.
credit risk.
b.
market risk.
c.
liquidity risk.
d.
security risk.
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 5
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.5.1 – LO: 7.5.1
23. A(n) ____________________ loan is a loan for which the amount of the payments, the rate of interest, and the
number of payments are fixed.
ANSWER:
installment
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
24. A home equity loan is essentially a second ____________________.
ANSWER:
mortgage
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
25. When banks refuse to provide a loan, or when they lend less than the customer requested, they are engaging
in ____________________.
ANSWER:
credit rationing
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.2 – LO: 7.1.2
26. The amount you borrow in a loan is called the ____________________.
ANSWER:
principal
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
27. A(n) ____________________ period is an amount of time you have to pay a credit card bill in full and avoid any
finance charges.
ANSWER:
grace
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.2 – LO: 7.2.2
28. The process of reviewing a loan for soundness is called ____________________.
ANSWER:
underwriting
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.1 – LO: 7.3.1
29. ____________________ are records of all who have requested a copy of a credit report within the last year.
ANSWER:
Inquiries
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.2 – LO: 7.3.2
30. The annual ____________________ rate is the amount of interest charge on a loan principal expressed as a yearly
figure.
ANSWER:
percentage
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 6
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
31. Services provided by banks that generate revenue but that are not included on their balance sheets are called
____________________.
ANSWER:
off-balance sheet activities
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.2 – LO: 7.1.2
32. ____________________ refers to using deposits to generate revenue by putting deposits to work via loans.
ANSWER:
Asset transformation
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.1 – LO: 7.1.1
33. Specific property that secures a loan is called ____________________.
ANSWER:
collateral
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
34. Suppose you borrow $1,000 and pay the loan back in 12 equal payments of $95.50. What is the finance charge for this
loan?
ANSWER:
$146
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
35. Suppose you borrow $5,000 and make 12 equal payments to retire the debt. If the finance charge for the loan is $400,
what will the amount of each monthly payment be?
ANSWER:
$450
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
36. Becky has a balance of $2,000 on her credit card. The minimum payment requirement is 4%. How much is the
minimum payment?
ANSWER:
$80.00
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
37. Markita has a balance of $3,400 on her credit card. The minimum payment requirement is 5%, and the card’s APR is
17%. If she makes the minimum payment, how much of it will go toward paying the interest? Round your answer to the
nearest hundredth.
ANSWER:
$48.16
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
38. Dominic has a balance of $1,460.20 on his credit card. The minimum payment requirement is 6%, and the card’s APR
is 18%. If he makes the minimum payment, how much of it will go toward reducing the balance? Round your answer to
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 7
the nearest hundredth.
ANSWER:
$66.31
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.4.1 – LO: 7.4.1
39. What are home equity loans based upon?
ANSWER:
Home equity loans are based upon the difference between what a home is worth and how
much the homeowner owes on a first mortgage.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
40. What is a finance charge?
ANSWER:
A finance charge is the total dollar amount to be paid for a loan.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
41. What is an acceleration clause?
ANSWER:
An acceleration clause brings the entire amount of a loan due if payments are missed.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
42. What occurs during a loan closing?
ANSWER:
During a loan closing, a bank representative discusses and explains the terms of the loan and
the borrower signs the documentation that has been prepared.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.1 – LO: 7.3.1
43. What is a consumer reporting agency?
ANSWER:
A consumer reporting agency is a company that compiles and keeps records on consumer
payment habits and sells these reports to banks and other companies to use for evaluating
creditworthiness.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.2 – LO: 7.3.2
44. What does securitization mean?
ANSWER:
Securitization occurs when individual loans are pooled together and then sold as securities.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.2 – LO: 7.1.2
45. How can a bank limit credit risk?
ANSWER:
A bank can limit credit risk by carefully screening loan applicants, setting and applying loan
policies, and monitoring outstanding loans.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.5.1 – LO: 7.5.1
Name:
Class:
Date:
46. Explain the difference between secured and unsecured loans.
ANSWER:
Secured loans are loans in which some item of value backs the loan in case the borrower
defaults on the loan. An unsecured loan is backed only by the reputation and creditworthiness
of the borrower.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.1 – LO: 7.2.1
47. What is a line of credit?
ANSWER:
A line of credit is a type of open-end loan that allows consumers to establish a certain sum
that they may draw on as needs arise. Borrowing may be for any amount up to an agreed-
upon limit. As the balance is paid down, more money may be borrowed.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.2.2 – LO: 7.2.2
48. What are the “three Cs” that underwriters use to evaluate loan applications? Briefly define them.
ANSWER:
The “three Cs” are collateral, capacity, and credit reputation. Collateral refers to the security
required for the loan. Capacity refers to the ability to repay the loan, based on income, job
history, and amount currently owed. Credit reputation, or credit history, is a record of how
well the applicant has repaid debt in the past.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.3.1 – LO: 7.3.1
49. For a bank, what is liquidity? What are some loan factors that affect a lending bank’s liquidity?
ANSWER:
For a bank, liquidity means having the funds to meet its obligations when required. Loan
factors affecting a lending bank’s liquidity include loan terms (short-term loans produce
profit more quickly than long-term loans), interest rate (higher rates produce more profit),
loan type (interest on consumer loans is usually paid monthly, whereas some business loans
are paid only once a year), and collateral.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.5.1 – LO: 7.5.1
50. Explain what it means to be a captive borrower.
ANSWER:
This describes how some segments of borrowers are more likely to prefer one type of lender
to another. For example, if a car company has a lower loan qualification standard than a
bank, then a consumer with a relatively weak credit history might opt for auto financing from
the car company. Because it is easier for a consumer with a weak credit history to obtain a
loan from the car company, that consumer is a captive borrower relative to the car financing
company.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 7.1.2 – LO: 7.1.2