CBP Credit Analysis and Lending 2

Question 1

Which financial ratio best measures a borrower's ability to service debt from operating cash flow?

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

DSCR compares net operating income to total debt service, directly measuring cash flow adequacy for loan repayment.

Question 2

In commercial lending, a 'covenant' is best described as:

Accepted Answer

A contractual condition borrowers must maintain

Answer

Loan covenants are contractual conditions (affirmative or negative) that borrowers agree to maintain to protect the lender's position.

Question 3

A borrower's working capital is calculated as:

Accepted Answer

Current assets minus current liabilities

Answer

Working capital equals current assets minus current liabilities and measures short-term liquidity and operational efficiency.

Question 4

Which type of loan structure is most appropriate for financing a seasonal business with fluctuating revenue?

Accepted Answer

Revolving line of credit

Answer

A revolving line of credit allows borrowers to draw and repay funds as needed, matching the cash flow cycles of seasonal businesses.

Question 5

The 'acid-test ratio' differs from the current ratio because it excludes:

Accepted Answer

Inventory

Answer

The acid-test (quick) ratio excludes inventory because it is the least liquid current asset and may not be quickly converted to cash.

(CBP) Certified Banking Professional Practice Test