1. A(n)___________________________________________ is generally used to finance the
purchase of inventory to sell and take advantage of the firm’s normal cash cycle to repay the loan.
2. A(n)______________________ is generally used to support the construction of homes,
apartments, office buildings and other permanent structures.
3. Working capital loans often require ______________________. These are required deposits in
the bank by the borrower whose size is dependent on the size of the credit line.
4. When the title to accounts receivables pledged in an asset based loan is passed to the lender and
the lender takes some of the responsibility for collecting the accounts receivables this is called
_____________________.
5. A(n)______________________ is the purchase of a publicly traded company by a small group of
investors. These investors often borrow very heavily to finance the purchase of the stock of the
company.
6. ____________________________________________ are potential claims against the borrower
which do not show up on the borrower’s balance sheet. One new form of this is due to
environmental damage by the borrower.
7. ______________________ are designed to fund long- and medium-term investments such as the
purchase of equipment. Money is borrowed in one lump sum and repayments are generally made
in installments.
8. A(n)____________________________________________ is a contractual promise by a bank to
lend to a customer up to a maximum amount of money at a set interest rate (or rate mark up over
prime or LIBOR). The only way the bank can renege on its promise is if there has been a
“material adverse change” in the borrower’s financial condition.
9. ______________________ examines how effectively assets are being utilized to generate sales
and how efficiently sales are converted into cash.
10. A(n)______________________ is a loan extended to a business firm by a group of lenders in
order to reduce the risk exposure to any one lending institution.
11. ______________________ refers to the protection afforded creditors of a firm based on the
amount of the firm’s earnings.
12. The borrower’s______________________ reflects his or her ability to raise cash in a timely
fashion at a reasonable cost.
13. ____________________________________________ are the ultimate standard of performance
in a market oriented economy. These measure the net income that remains for owners after all
expenses have been charged against revenues.
14. ______________________ refers to the borrowers’ use of debt in their firm.
15. Wages and salaries to net sales, overhead expenses to net sales and cost of goods sold to net sales
are all measures of ____________________________________________.
16. ____________________________________________ is a way to price loans which starts with
the costs of making a loan and adds to it a risk premium for default risk and a desired profit
margin.
17. The______________________ approach to pricing a loan starts with a base interest rate and adds
a risk premium for default and for time to maturity.
18. The______________________ is the interest rate charged the bank’s most creditworthy
customers on short-term working capital loans.
19. _____________________ is the rate on short-term Eurocurrency deposits which range in
maturity from a few days to a few months.
20. The_______________________________________ is a way to price loans which allows banks
to compete with the commercial paper market.
21. The______________________ is a way of pricing loans that allows a bank to take into account
the entire relationship the bank has with the customer when pricing the loan.
22. ______________________ is the average deposit balance by the customer minus the average
float adjusted for reserve requirements.
23. The______________________________________ is the risk premium that has to do with the
quality of the borrower.
24. The______________________ is the risk premium that has to do with the time to maturity on the
borrowed funds.
25. _____________________________is the base of the cost-plus loan pricing model.
26. In the price leadership model, the amount above the price rate is often called the _____________.
27. A proposed loan is acceptable when the net rate of return from a customer profitability analysis
is______________________ .
28. SNCs are also known as _____________ loans.
29. Weak loans considered to be substandard or doubtful in quality are also known as __________
credits.
30. An interest rate most widely used to price loans extended by banks operating in the U.S. is
_________.
31. The is the rate considered to the most common base rate figure
announced by the majority of the 25 largest banks that publish their prime rates regularly.
32. With the advent of inflation and more volatile interest rates gave rise to a(n) , tied to
changes in important money market interest rates such as the 90 day commercial paper rate.
33. loans represent the earliest form of lending that banks have
carried out in their more than 2000 year history.
34. provide businesses with short-term credit lasting from a few days
to about one year. These loans come close to self-liquidating loans.
35. support installment purchases of automobiles, home
appliances, furniture, business equipment and other durable goods by financing the receivables
that dealers take on when they write installment contracts to cover customer purchases.
36. One of the most aggressive competitors with banks today are . Examples
include GMAC, Ford Motor Credit and GE Capital.
37. The apparent size bias in the financial marketplace led to the creation of the in the
1950’s to guarantee loans made to small businesses by private lending institutions.
38. The most risky of all business loans are . This is credit to finance the
construction of fixed assets designed to generate a flow or revenue in future periods. This can
include financing a new oil refinery or power plant or other similar fixed assets.
39. A firm’s balance sheet and income statement expressed as a percentage of total assets or total
sales are often called .
40. A third financial statement used in addition to the income statement and balance sheet by lenders
is the . It is required by FASB and is usually readily available from
borrowers.
41. Foreclosure on property pledged behind a bank loan does not subject a bank to liability to clean
up any environmental damage the borrower may have caused to happen.
42. In the United States about 25 percent of banks’ total loans consist of commercial and industrial
loans.
43. Self-liquidating business loans are designed to take advantage of the normal cash cycle in a
business firm.
44. Short-term (under one year) loans to business firms account for over half of all bank loans to
businesses in the United States.
45. Working-capital loans are normally secured by a business firm’s plant and equipment.
46. Working-capital loans, unlike most other types of business loans, usually do not require the
customer to keep a compensating deposit balance with the lending bank.
47. Leveraged buyouts (LBOs) involve the purchase of businesses or of selected assets from business
firms with at least 75 percent of the cost of the purchase funded by current earnings and sales of
stock.
48. A project loan secured by the credit of the company or companies sponsoring the project is called
a project loan granted on a recourse basis.
49. Term loans normally are secured by accounts receivable and inventory.
50. Term loans look primarily to the flow of future earnings of the borrowing business firm to
amortize and retire its loan.
51. Under recent EPA guidelines if a lender forecloses on environmentally damaged property, the
lender must post that property for sale within 12 months after securing marketable title.
52. To avoid environmental liability under recent EPA guidelines a lender must accept any bona fide
offer for property foreclosed upon if the offer would fully repay the remaining amounts owed.
53. Under current federal laws a lender is required to make an environmental site assessment of the
borrower’s property in order to avoid environmental liability.
54. Floorplanning agreements typically include a loan-loss reserve, built up from interest earned as
borrowers repay their installment loans.
55. If a bank’s agent visits a dealer using floorplanning and finds any inventory items sold for which
the bank providing financing has not received payment, the loan will be immediately foreclosed
upon.
56. When a bank examines a borrower’s operating efficiency they are looking at the protection
afforded creditors from the borrower’s earnings.
57. The firm’s coverage ratios measure how carefully the firm’s management monitor and control its
expenses.
58. Liquidity measure a business firm’s ability to raise cash in a timely fashion at a reasonable cost.
59. The ultimate standard of performance in a market-oriented economy is how much net income
remains after all expenses have been charged against revenues.
60. The business loan pricing method that relies upon banks knowing what their costs are is the price
leadership model.
61. The price leadership method of loan pricing includes a markup for default risk, but not for term
risk.
62. The sum of the default-risk premium plus the term risk premium on a business loan is one of the
elements of the cost-plus loan pricing method.
63. In order to control the risk exposure on their business loans most banks use both price and credit
rationing to regulate the size and composition of their loan portfolios.
64. In a period of rising interest rates the times-prime method causes the customer’s loan rate to rise
faster than the prime-plus method.
65. If interest rates fall, a customer’s loan rate will decline more rapidly under the times-prime
method than under the prime-plus method of business loan pricing.
66. Banks attempting to compete with the growing commercial paper market developed the cost-plus
business loan pricing method.
67. The loan-pricing method that takes the whole customer relationship into account when pricing
each loan request is known as the cost-benefit loan pricing method.
68. The loan-pricing technique known as CPA can be used to identify the most profitable types of
bank customers and loans and also who are the most successful loan officers.
69. The basic strength of the cost plus loan pricing method is that it considers the competition from
other lenders.
70. The basic weakness of the cost plus loan pricing method is that it does not consider the
competition from other lenders when setting the loan price.
71. The basic strength of the below prime market pricing model is that it allows the bank to compete
with the commercial paper market.
72. The basic weakness of the below prime market pricing model is that there are narrow margins or
markups on loans.
73. The majority of syndicated loans are held by banks.
74. Syndicated loans are a type of working capital loan.
75. According to the textbook, small business lending by banks is on the decline.
76. The amount of business lending tends to rise during periods of expansion.
77. The amount of business lending tends to fall during recessionary periods.
78. Financial institutions generally use internal credit rating systems to evaluate credit quality.
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):
A) Self-liquidating
B) Working capital loan
C) Interim construction loan
D) Asset-based loan
E) None of the above
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:
A) Working capital loans
B) Term loans
C) Interim construction financing
D) Durable goods loan
E) None of the above
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):
A) Working capital loan
B) Project loan
C) Bullet loan
D) Interim construction loan
E) None of the above
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):
A) Interim construction
B) Project loan
C) Working-capital loan
D) Revolving line of credit
E) None of the above
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 borrower.
D) A and B
E) B and C
84. Banks oftentimes bid on the opportunity to finance the entire inventory of an automobile dealer
through a ___________ arrangement.
A) Factoring
B) Floorplanning
C) Project loan
D) Revolving line of credit
E) None of the above
85. The most common sources that lenders look to for repayment of business loans include all of the
following except:
A) The borrower’s cash flow
B) Assets pledged as collateral
C) Relatives of the borrowe.
D) The borrowers net worth
E) None of the above
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
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:
A) Lender Protection Program
B) Environmental Risk Assessment Program
C) Lender Liability Security Program
D) Environmental Pollution Control Program
E) None of the above.
88. Term loans normally are secured by:
A) Fixed assets
B) Accounts receivable
C) Inventories
D) Personal property
E) None of the above.
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
B) Income Before Interest and Taxes/ Interest Payments
C) Cost of Goods Sold/ Net Sales
D) Current Assets/ Current Liabilities
E) All of the Above
91. A bank that wants to examine the liquidity of a borrower would most likely examine which of the
following ratios?
A) Costs of Goods Sold/ Average inventory
B) Income Before Interest and Taxes/ Interest Payments
C) Cost of Goods Sold/ Net Sales
D) Current Assets/ Current Liabilities
E) All of the Above
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?
A) Customer’s Control over Expenses
B) Customer’s Liquidity
C) Customer’s Operating Efficiency
D) Customer’s Profitability
E) None of the Above
93. A government security dealer requires credit to add new government securities to his security
portfolio. What type of loan is this?
A) Self-liquidating inventory loan
B) Working capital loan
C) Security dealer financing
D) Revolving line of credit
E) None of the above
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?
A) Self-liquidating inventory loan
B) Working capital loan
C) Security dealer financing
D) Revolving line of credit
E) None of the above
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
B) Working capital loan
C) Security dealer financing
D) Revolving line of credit
E) None of the above
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?
A) Self-liquidating inventory loan
B) Working capital loan
C) Security dealer financing
D) Revolving line of credit
E) None of the above
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:
A) An LBO
B) A revolving line of credit
C) A working capital loan
D) A syndicated loan
E) None of the above
98. A bank that is examining the ratio of total liabilities to total assets is examining which category of
ratios?
A) Expense Control Measures
B) Operating Efficiency Measures
C) Coverage Measures
D) Liquidity Measures
E) Leverage Measures
99. A bank that is examining the ratio of costs of goods sold to inventory is examining which
category of ratios?
A) Expense Control Measures
B) Operating Efficiency Measures
C) Coverage Measures
D) Liquidity Measures
E) Leverage 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
B) Operating Efficiency Measures
C) Coverage Measures
D) Liquidity Measures
E) Leverage Measures
101. Which dimension of a business firm’s financial and operating performance would unfunded
pension liabilities fit best?
A) Profitability measure
B) Market indicator
C) Contingent liability
D) Marketability of the product or service
E) None of the above
102. Which dimension of a business firm’s financial and operating performance would the percentage
change in the firm’s stock price fit best?
A) Profitability measure
B) Market indicator