BMO Credit & Lending Fundamentals 2

Question 1

What does loan amortization refer to?

Accepted Answer

The gradual repayment of a loan through scheduled payments covering both principal and interest

Answer

The process of writing off a loan as a loss after default

Answer

The adjustment of a variable interest rate over the loan term

Answer

The fee charged by a bank to originate a new loan

Question 2

What is the key difference between a fixed-rate and a variable-rate loan?

Accepted Answer

A fixed rate stays constant throughout the loan term, while a variable rate fluctuates with market benchmarks

Answer

Fixed-rate loans are only available for mortgages, while variable-rate loans apply to all products

Answer

Variable-rate loans always carry lower interest than fixed-rate loans

Answer

Fixed-rate loans require collateral, whereas variable-rate loans are always unsecured

Question 3

What is a Home Equity Line of Credit (HELOC)?

Accepted Answer

A revolving credit facility secured by the borrower's home equity

Answer

A government-insured mortgage for first-time homebuyers

Answer

A fixed-term loan used to purchase investment properties

Answer

An unsecured personal loan granted based on home ownership

Question 4

What is the prime rate in Canadian banking?

Accepted Answer

The benchmark lending rate set by major banks, typically tied to the Bank of Canada's policy rate

Answer

The interest rate charged between chartered banks for overnight lending

Answer

The maximum rate lenders may charge retail customers by law

Answer

The rate applied exclusively to government-guaranteed student loans

Question 5

What does a loan-to-value (LTV) ratio indicate?

Accepted Answer

The proportion of a property's value financed by the loan relative to its appraised value

Answer

The ratio of monthly loan payment to the borrower's monthly income

Answer

The percentage of interest versus principal in each loan payment

Answer

The lender's expected return on a lending portfolio

Question 6

What is the primary function of a credit bureau (e.g., Equifax, TransUnion)?

Accepted Answer

To collect, maintain, and report consumer credit history to lenders

Answer

To set national interest rate policies on behalf of the central bank

Answer

To insure lenders against borrower defaults

Answer

To provide direct consumer lending at regulated rates

Question 7

What is a balloon payment in the context of a loan?

Accepted Answer

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

Answer

A penalty fee charged for early repayment of a loan

Answer

An additional monthly surcharge added when a borrower misses a payment

Answer

A promotional payment deferral offered during the first year of a mortgage