Final exam Flashcards by Chloe Jacobs

Credit 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 it?

a. Interm constructions financing
b. working capital loan
c. security dealer financing
d. revolving credit financing
e. none of the options are correct

working capital loan

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Term of an inventory loan is being set to match the exact length of time needed to generate suficient cash to repay the loan. What type of loan is this?

a. self liquidating inventory loan
b. working capital loan
c. asset based loan
d. revolving credit financing
e. none are correct

self liquidating inventory loan

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Short term lending to support the construction of homes, apartments, office buildings, shopping centers and other permanent structures is known as:

a. self liquidating
b. working capital
c. interim construction loan
d. Long term project loan
e. all of the above

interim construction loan

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A bank that wants to examine the operating efficiency of a borrower would most likely examine which of the following ratios:
current assets/current liabilities
cost of good sold/net sales
cost of goods sold/avg inventory
Income before interest and taxes/interest payment

cost of goods sold/avg inventory

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A bank is concerned bc they feel that a firm will not be able to raise enough cash to pay bills that are due w/in the next year. What ratio are they most likely to examine to address this concern?
Selling and admin expenses/ net sales
net sales/ total assets
net income/ total assets
current assets/ current liabilities
long term debt/ long term debt and net worth

current assets/ current liabilities

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Working capital loans, self liquidating inventory, interim construction financing loans, retai and equip financing, and asset based loans are all what type of loan?

short term biz loans

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revolving credit financing, equipment, rolling stock, project loans, and support aquisitions are all what type of loans

long term biz loans

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These types of biz loans last a few days to a year. Often used to fund the purchase of inventories in order to put goods on the shelves or to purchase raw materials. Typically if the comp is generating revenue these loans are renewed

working capital loans- ongoing basis; in order to continually run my biz I need a certain amt of goods to buy, take loan to get inventory. I know what capital I need so get loan and pay back every month at certain time

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These types of biz loans help extend short term credit to businesses. They are used to finance the purchase of inventory (raw materials or finished goods to sell)

self liquidating loans- once I liquidate all of my inventory i will pay back the loans

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These types of biz loans are used to support the construction of houses, apartments, office buildings, shopping centers, and other permanent structures

interim construction financing

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These types of biz loans are for biz lenders to support installment purchases of home appliances, cars, furniture, biz equipment, and other durable goods by financing the receivables that dealers selling these goods take on when they write installment contracts to cover customer purchases

retail and equip financing

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These types of biz loans are credit secured by the shorter-term assets of a firm that are expected to roll over into cash in the future

asset based financing

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These types of biz loans allow a customer to borrow up to a prespecified limit, repay all or a portion of the borrowing, and reborrow as necessary until the credit line matures

revolving credit line

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These are the most risky of all biz loans. These credit ti finance the construction of fixed assets designed to generate to a flow of revenue in future periods

project loans- changing interest rates and are much larger, last multiple years, make a lot of money

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What types of loans are usually secured by fixed assets and support acquisitions

long term biz loans

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what are the sources of repayment for biz loans

cash and cash flow (primary one)

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What does operating efficiency measure

measure of a biz firms performance effectiveness

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What two things does operating efficiency look at?

assets utilized to general sales

2. sales converted into cash

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What type of ratios are these: net sales/ net fixed assets; net sales/ total assets; net sales/ accts recievable and COGS/ inventory

op eff

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this ratio measures the biz ability to be able to market goods, services, or skills successfully

marketability of products or services

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gross profit margin, net profit margin

Examples of marketability ratios

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What ratios refers to the protection afforded creditors based on the amt of a biz customers earnings; measures the adequacy of earnings; measures of a company’s ability to service its debt and meet its financial obligations such as interests payments or dividends.

coverage ratios

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What ratio reflects the biz ability to raise cash in a timely fashion. Ie meeting loan payments when they come due

liquidity ratios

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current ratio
acid test ratio
net liquid assets
net working capital

Examples of liquidity ratios

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What ratio reflects the standard of performance in an economy is how much net income remains for the owners of a biz firm after all expenses are charged against revenue.

profitability ratios

ROA ROE ROS

Examples of profitability ratios

What ratio is used to analyze any borrowing biz credit standing and use of fin leverage include. Looks at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations.

leverage

capitalization ratio | debt to sales ratio

Examples of leverage ratios

is a potential liability that may occur, depending on the outcome of an uncertain future event.

contingent liability

Guarantee, warranties, litigation, unfunded pensions, taxes owed, environmental liabilities, and underfunded pension liabilities are all ex of

contingent liabilities

This provides insights into how and why a firms cash balance has changed and helps to decide if the borrower will be able to generate sufficient cash to support its production and sales activities and still be able to repay lender? or why the cash position of the borrower is changing over time?

statement of cahs flow

What is the cash flow by origin (equation)

net cash flow from operations + net cash flow from investing activities + net cash flow from financing activities

what is the traditional direct operating cash flow

net cash flow from operations

These statements are used to project the future

pro forma statement

The longer the time the _____ risk

greater- 20 yr loan a lot could happen in that time

These protect its holder against rising markets interest rates; ensures that inst lending them money cannot increase their loan rate above a certain level

interest rate caps

This is established to that no matter how far loan rates rumble, it is guaranteed some min rate of return

interest rate floors

This is a mixture of rate floor and rate caps

int rate collars

What is the principal reason fin firms exist?

to make loans

These types of loans are secured by real property (land, buildings) and include short term loans for construction and land development and longer term loans to finance the purchase of farmland, homes, apartments, commercial structures, and foreign properties

real estate loans

These types of loans include credit to banks, insurance companies, finance companies, and other fin. inst.

financial inst loans

These types of loans are extended to farms and ranches to assist in planting and harvesting crops and supporting the feeding and care of livestock

agricultural loans

These types of loans are granted to biz to cover purchasing inventories, taxes, and meeting payroll

commercial and indus loans

These types of loans include credit to finance the purchase of cars, homes, appliances, other retail goods, to repair and modernize homes, and to cover the cost of medical care and other personal expenses, and are either extended directly to indiv or indirectly thru retail dealers

loans to indiv

These types of loans include all other loans (ie security loans)

misc loans

These types of loans are where the lender buys equip or vehicles and leases them to its cust

lease financing recievables

Characteristics of the market area it serves

1. Banks can purchase whole loans or pieces of loans from other lenders and share in other lenders 2. Lender size 3. Legal lending limit- don't want to give big loans to everyone. Give loans based off of capital

These lenders are often larger banks who devote the bulk of their credit portfolios to large denomination loans to biz firms

wholesale lenders

These lenders are often small banks who in the form of smaller denomination personal cash loans and home morgage loans extended to indiv and families and small biz loans

retail credit

What does the legal lending limit say

an unsecured loan to a single cust cannot exceed 15% of a banks capital

What regulations were put on the bank to help w loans?

sarbance oxley- The legislation, sought to both improve the reliability of the public companies' financial reporting as well as restore investor confidence Comm reinvest act (1977)- requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods. Equal credit opp act- can't deny ppl loans based on sex, religion, race. Must disclose true cost and list all charges and fees

When a bank has good asset quality then they get _____ examinations

less

What type of loan classification did not meet the banks loan policy and docs were not fully documented

criticized loans classification

What type of loan classification is dangerous concentrated of one borrower or one industry

scheduled loans clasification

What type of loan classification means that a payout is not as planned?

adversely classified

This type of loan looks weak and could default; banks must watch it carefully

substandard loan

This kind of loan has a strong probability that there will be noncollectable losses

doubtful loans

This kind of loan will have to be written off or at least part of it will bc its uncollectible

loss loan

What are the 6 steps in the lending process

1. finding a prospective loan cust 2. Eval a cust character and purpose 3. site eval and eval cust credit record 4. Eval prospective fin condition 5. Assesing possible loan collateral and loan agreement 6. Monitoring compliance w loan agreement and service needs

What are the 6 cs to decide if someone is creditworthy

1. character- well defined purpose for requesting credit and serious intention to pay 2. capacity- must have authority to request a loan (minors) 3. cash/cash flow- does the borrower have the ability to gen cash to repay 4. Collateral- does the borrower have enough net worth to provide adequate support for the loan 5. Conditions- look at how specific industry is doing 6. Control- will changes in law affect the borrower

What are 2 important aspects of credit anlysis in the loan agreement

1. meets the borrowers needs for funding and repayment program 2. proper accommodations, lending more or less requested over a defined time. Lender perfect its claim against the borrower earnings and pledged collateral

This is a secondary source of repayment that borrowers will be asked to pledge. Normally in the form or assets. Used to guarantee repayment of losses

collateral

Accts recievable, inventory, real property, personal property, machinary, equip, rolling stock, and personal and corporate guarantees of repayment can all be used as

collateral

Primary sources of repayment

1. cash flow of borrower | 2. agreed to conversion of assets from loan purpose

Promissory note, Loan commitment agreement, collateral, affirmative and negative covenants, borrowers guarantees or warranties, and event defaults are all parts of

A loan agreement

What is a written contract that specified the principal amt of the loan

Promissory note

What normally accompanies larger biz and hike mortgage loans? In this the lender normally promised to make credit available to the borrower over a designated future period up to a max amt in return for a commitment fee

Loan commitment agreement

Affirmative covenant

Requires the borrower to take certain actions; promise to do

Negative covenant

Restrict the borrower for doing certain things without lender approval; promise not to do

Give ex of warning signs of a problem loan

- missed payments - overdrafts (checks bouncing) - change accounting process - deviation from projections - financial losses

This type of loan is granted to indiv and families. Normally credit to finance the purchase of a home or fund improvements on a private residence. Normally long term loans

Residential mortgage loans

These types of loan granted to indiv and families include installment and noninstallment loans and credit cards.

Nonresidential loans

Short/medium term loans repayable in 2+ consecutive payments

Installment loans

Short term loans indiv and families draw upon when they have an immediate need for cash and are repayable in a lump sum

Noninstallment loans

New consumer regulations: consumer federal protection bureau and Dodd frank did what?

Raise annual percentage rate (apr) unless prior written notice Billing statements of 3 weeks before monthly pmts are due Indicate amt of interest and consequences of paying min amt

What did the Dodd frank Wall Street reform say?

Pooling and securitizing mortgage loans must have at least 5% of the credit risk

To outlaw discrimination they came up with what two acts?

Equal credit opportunity | Community reinvestment act

Explain an example of predatory lending

Subprime loans- banks grant these loans to borrowers w below average credit records and charge excessive fees for these lower quality loans

What does the consumer financial protection bureau do?

1. Warns consumers of possible damaging fin practices 2. Promotes financial literacy among customers 3. Improves clarity and transparency of fin service contracts; benefit public

Why did they make credit card regulations?

1. Slow the expansion of cards offered to customers w low credit rating 2. Evidence that customers were charged high fees, but encouraged to make low min pmts- resulting in negative amortization

What are the key factors of an customer loan application

1. Check credit bureaus for credit history 2. Size and stability of income levels 3. deposit balances 4. Employment stability 5. Residential stability 6. Pyramiding of debt 7. Seek co-signers

Why do lenders use credit scoring? Why do they use automated determining system?

to evaluate the loan applications they receive from consumers Use automated credit determining system to remove personal judgement from the lending proces and reduces aproval costs

What are the ranking priorities of approval criteria?

1. Pmt history 2. Money owed 3. Length of credit history 4. Nature of new credit requests 5. Types of credit borrower has already used

What type of loans do depository inst and finance and insurance comp make to fund the acquisition of real property (ie homes, apartments, shopping centers, office buildings)?

real estate loans

What is important abt real estate loans

1 diff types and risk 2 high dollar amount 3 long maturities 4 loan to value ratio- drives the critical imp of real estate appraisals. Therefore the need for real estate appraisal regulations were developed

Homeowners whose residence has appreciated in value can use the equity in their homes, the diff bw a homes estimated mrkt value and the amt of mortgage loans agaisnt it as a borrowing base. This is what type of lending?

home equity lending

What is bigger LT i or ST?

Depends on graph LT ir> ST ir if upward slopping- inflation ST>LT if downward slopping- no inflation

What is the formula for demand?

refer to notes | -D x (i)/(1+i)

``` What is the banks net profit margin? NI= 55 Total op rev= 650 Total earning assets= 4055 Total equity capital= 350 ```

Net profit margin: net profit margin/total op rev | 55/650= 8.46%

If national bank's asset duration exceeds its liability duration and it interest rates rise, the banks net worth will

decrease

Market prices and interest rate move in _____ direction

opposite

A liability sensitive bank will experience an ___ in its net interest margin if interest rises

decrease | IR increases, net interest margin decreases

T/F The yield curve is constructed using corporate bonds with diff default risks, so that the bank can determine risk/ return trade-off for default risk

F | yield curve depicts yield rate and maturity or term

T/F A bank w a negative duration gap experiencing a rise in interest rates will experience an increase in its net worth

T | neg duration gap w rise in IR will experience increase in net worth