Banking Exam Commercial Lending Principles 2

Question 1

A borrower's Debt Service Coverage Ratio (DSCR) is 1.15. What does this indicate?

Accepted Answer

The borrower generates 15% more cash flow than needed to cover debt obligations

Answer

A DSCR of 1.15 means net operating income is 1.15 times the total debt service, providing a 15% cushion above required payments.

Question 2

Which type of commercial loan structure requires the borrower to pay interest only during the draw period and then repay principal upon maturity?

Accepted Answer

Construction loan

Answer

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.

Question 3

When a lender takes a 'blanket lien' on a borrower's assets, what does this mean?

Accepted Answer

The lender has a security interest in all of the borrower's business assets

Answer

A blanket lien grants the lender a security interest in all present and future business assets of the borrower, providing broad collateral coverage.

Question 4

What is the primary purpose of a loan covenant in a commercial lending agreement?

Accepted Answer

To establish borrower behavior standards that protect the lender's position

Answer

Loan covenants are contractual conditions that require borrowers to maintain certain financial metrics or behaviors, protecting the lender from deteriorating credit quality.

Question 5

A commercial borrower has current assets of $500,000 and current liabilities of $350,000. What is the current ratio?

Accepted Answer

1.43

Answer

The current ratio is calculated by dividing current assets by current liabilities: $500,000 ÷ $350,000 = 1.43.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Commercial Lending Principles 2