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

Amortization describes how a loan is paid down over time through regular payments that reduce both the outstanding principal and interest owed.

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

A fixed rate provides payment certainty for the borrower, while a variable rate changes in response to benchmark rates such as the prime rate, affecting monthly payments.

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 HELOC allows homeowners to borrow against the equity in their home on a revolving basis, using the property as collateral.

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 prime rate is a benchmark used by banks like BMO to price variable-rate loans and lines of credit, and it moves in tandem with the Bank of Canada's overnight rate.

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

LTV is calculated by dividing the loan amount by the appraised property value; a lower LTV indicates less lender risk because the borrower has more equity in the asset.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Credit & Lending Fundamentals 2