Banking Exam Commercial Lending Principles 4

Question 1

Which of the following is a key characteristic of an 'asset-based lending' (ABL) structure?

Accepted Answer

Loan availability is tied to a borrowing base calculated from eligible receivables and inventory

Answer

In asset-based lending, the maximum loan amount fluctuates based on a borrowing base—typically a percentage of eligible accounts receivable and inventory.

Question 2

A 'balloon payment' in a commercial loan refers to:

Accepted Answer

A large lump-sum payment due at the end of the loan term after smaller periodic payments

Answer

A balloon payment is a large final payment due at loan maturity, common when the loan amortizes over a longer period than its actual term.

Question 3

In commercial lending, what is 'covenant lite' (cov-lite) financing?

Accepted Answer

Loans with few or no ongoing financial maintenance covenants, giving borrowers more flexibility

Answer

Cov-lite loans have minimal or no maintenance covenants, reducing the lender's ongoing monitoring ability and increasing credit risk, particularly common in leveraged buyout financing.

Question 4

Which financial statement is MOST useful for assessing a commercial borrower's ability to generate cash to service debt?

Accepted Answer

Statement of cash flows

Answer

The statement of cash flows directly shows cash generated and used across operating, investing, and financing activities, revealing the actual cash available to service debt.

Question 5

A lender requires a borrower to maintain a minimum tangible net worth of $2 million. This is an example of:

Accepted Answer

An affirmative financial covenant setting a minimum threshold

Answer

An affirmative (maintenance) financial covenant requires the borrower to maintain specified financial metrics, such as minimum net worth, throughout the loan term.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Commercial Lending Principles 4