Commercial Lending Principles Flashcards
7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Commercial Lending Principles flashcards as text
A borrower's Debt Service Coverage Ratio (DSCR) is 1.15. What does this indicate?
Answer: The borrower generates 15% more cash flow than needed to cover debt obligations
A DSCR of 1.15 means net operating income is 1.15 times the total debt service, providing a 15% cushion above required payments.
Which type of commercial loan structure requires the borrower to pay interest only during the draw period and then repay principal upon maturity?
Answer: Construction loan
Construction loans typically have an interest-only draw period while the project is being built, followed by conversion to permanent financing or a balloon payment at maturity.
When a lender takes a 'blanket lien' on a borrower's assets, what does this mean?
Answer: The lender has a security interest in all of the borrower's business assets
A blanket lien grants the lender a security interest in all present and future business assets of the borrower, providing broad collateral coverage.
What is the primary purpose of a loan covenant in a commercial lending agreement?
Answer: To establish borrower behavior standards that protect the lender's position
Loan covenants are contractual conditions that require borrowers to maintain certain financial metrics or behaviors, protecting the lender from deteriorating credit quality.
A commercial borrower has current assets of $500,000 and current liabilities of $350,000. What is the current ratio?
Answer: 1.43
The current ratio is calculated by dividing current assets by current liabilities: $500,000 ÷ $350,000 = 1.43.
Which loan pricing method sets the interest rate at a spread above a benchmark rate such as SOFR?
Answer: Floating-rate pricing
Floating-rate pricing ties the loan's interest rate to a benchmark like SOFR plus a spread, causing the rate to adjust as the benchmark moves.
In commercial real estate lending, what does LTV stand for and what does a lower LTV generally indicate?
Answer: Loan-to-Value; a lower LTV indicates less risk and more equity cushion for the lender
LTV (Loan-to-Value) measures the loan amount relative to the property's appraised value; a lower LTV means more borrower equity, reducing the lender's risk.