Banking Exam Retail and Corporate Banking 3 — Questions and Answers
Question 1: A corporate treasurer asks about a banker's acceptance (BA). This instrument is best described as:
- A promissory note guaranteed by the Federal Reserve
- A time draft drawn on and accepted by a bank, creating a short-term money market instrument (Correct answer)
- A floating-rate corporate bond underwritten by a commercial bank
- A type of commercial paper backed by retail mortgage pools
Correct answer: A time draft drawn on and accepted by a bank, creating a short-term money market instrument
A banker's acceptance is a time draft that a bank 'accepts' (guarantees), making it a tradeable, highly liquid money market instrument.
Question 2: Which of the following best describes a syndicated loan in corporate banking?
- A loan originated and held entirely by one bank to reduce documentation costs
- A loan provided by a group of lenders sharing the risk under common terms arranged by a lead bank (Correct answer)
- A government-guaranteed facility issued through the SBA
- A subordinated debt instrument converted to equity upon default
Correct answer: A loan provided by a group of lenders sharing the risk under common terms arranged by a lead bank
Syndicated loans spread large credit exposures among multiple lenders who share terms negotiated by a lead arranger.
Question 3: In retail mortgage lending, a 'points' payment at closing represents:
- A prepayment penalty charged by the lender
- Prepaid interest, with each point equaling 1% of the loan amount (Correct answer)
- Private mortgage insurance premium paid upfront
- The origination fee expressed as a dollar amount
Correct answer: Prepaid interest, with each point equaling 1% of the loan amount
Each discount point equals 1% of the loan amount and is prepaid interest that typically lowers the ongoing interest rate.
Question 4: The primary purpose of the Federal Deposit Insurance Corporation (FDIC) is to:
- Set monetary policy and control the money supply
- Regulate the issuance of bank charters for national banks
- Protect depositors and maintain stability by insuring deposits up to the statutory limit (Correct answer)
- Supervise bank holding companies and their non-bank subsidiaries
Correct answer: Protect depositors and maintain stability by insuring deposits up to the statutory limit
The FDIC insures deposits (currently up to $250,000 per depositor per ownership category) and resolves failed insured institutions.
Question 5: A 'covenant-lite' corporate loan differs from a traditional leveraged loan primarily because it:
- Carries a floating rate tied to LIBOR rather than SOFR
- Lacks maintenance financial covenants requiring periodic ratio tests (Correct answer)
- Is fully secured by collateral valued at 150% of the loan
- Requires borrower equity participation in the lending syndicate
Correct answer: Lacks maintenance financial covenants requiring periodic ratio tests
Covenant-lite loans omit maintenance covenants that would otherwise trigger a default if the borrower's financial ratios deteriorate.
Question 6: Under the Bank Secrecy Act (BSA), US banks must file a Currency Transaction Report (CTR) for cash transactions exceeding:
- $5,000 in a single day
- $10,000 in a single day (Correct answer)
- $25,000 in a single day
- $50,000 in a calendar month
Correct answer: $10,000 in a single day
Banks must file a CTR with FinCEN for any cash transaction — deposit, withdrawal, or exchange — exceeding $10,000 in a single business day.
Question 7: A retail bank offers a home equity line of credit (HELOC). Which risk is MOST unique to HELOCs compared to fixed home equity loans?
- Credit risk from borrower default
- Interest rate risk because HELOCs typically carry variable rates (Correct answer)
- Collateral risk from property value decline
- Prepayment risk from early loan payoff
Correct answer: Interest rate risk because HELOCs typically carry variable rates
HELOCs are usually variable-rate products, meaning borrowers face payment increases when benchmark rates rise, unlike fixed home equity loans.
Banking Exam Retail and Corporate Banking 3
A corporate treasurer asks about a banker's acceptance (BA).
This instrument is best described as: