Banking Credit Analysis 3

Question 1

A borrower's quick ratio is 0.6. What does this suggest?

Accepted Answer

The borrower may struggle to meet immediate obligations without selling inventory

Answer

A quick ratio below 1.0 indicates that liquid assets (excluding inventory) are insufficient to cover current liabilities, signaling liquidity risk.

Question 2

In credit underwriting, what does 'seasoning' of a loan refer to?

Accepted Answer

The length of time a loan has been outstanding with a payment history

Answer

Loan seasoning refers to the time elapsed since origination, with more seasoned loans providing actual payment performance data to assess credit quality.

Question 3

Which financial statement is most useful for assessing a company's ability to repay debt over time?

Accepted Answer

Cash flow statement

Answer

The cash flow statement shows actual cash generation and usage, making it the best indicator of a borrower's ability to service debt obligations.

Question 4

What is 'credit migration' in portfolio credit analysis?

Accepted Answer

A borrower's shift in credit rating over time

Answer

Credit migration tracks how a borrower's credit rating changes (upgrades or downgrades) over a period, reflecting changing credit quality in a portfolio.

Question 5

A bank requires a loan-to-value (LTV) ratio of no more than 80% for a commercial real estate loan. The property is appraised at $1,000,000. What is the maximum loan amount?

Accepted Answer

$800,000

Answer

Maximum loan = LTV × Appraised Value = 80% × $1,000,000 = $800,000.

Banking Practice Test

Banking Practice Test

Banking Credit Analysis 3