CBP Credit Analysis and Lending 3 — Questions and Answers
Question 1: In a leveraged buyout (LBO) loan analysis, the primary repayment source is typically:
- Asset liquidation proceeds
- Equity capital injections
- Target company's operating cash flows (Correct answer)
- Government guarantees
Correct answer: Target company's operating cash flows
LBO loans are repaid through the acquired company's future operating cash flows, making DSCR and EBITDA projections critical to underwriting.
Question 2: What does 'amortization' mean in the context of a commercial loan?
- Increasing the interest rate over time
- Gradual repayment of principal over the loan term (Correct answer)
- Converting variable rate to fixed rate
- Writing off uncollectible loan balances
Correct answer: Gradual repayment of principal over the loan term
Amortization refers to scheduled, systematic repayment of loan principal over the loan's life through periodic payments.
Question 3: A 'guaranty' in lending differs from collateral because it:
- Is a physical asset pledged to secure the loan
- Represents a promise by a third party to repay if the borrower defaults (Correct answer)
- Is a government insurance program for lenders
- Reduces the loan's interest rate automatically
Correct answer: Represents a promise by a third party to repay if the borrower defaults
A guaranty is a personal or corporate promise by a third party (guarantor) to fulfill the borrower's obligation upon default.
Question 4: Which credit analysis technique projects a company's future financial position under adverse scenarios?
- Trend analysis
- Stress testing (Correct answer)
- Ratio benchmarking
- Peer comparison analysis
Correct answer: Stress testing
Stress testing evaluates a borrower's ability to service debt under negative economic conditions, such as revenue decline or interest rate increases.
Question 5: Under the 5 Cs of credit, 'Capital' refers to:
- The purpose of the loan
- The borrower's net worth and financial reserves (Correct answer)
- The economic environment affecting repayment
- The assets pledged as security
Correct answer: The borrower's net worth and financial reserves
Capital represents the borrower's own financial investment or net worth, showing skin-in-the-game and ability to absorb losses.
Question 6: An interest reserve in a construction loan is used to:
- Pay principal during the draw period
- Fund interest payments while the project generates no income (Correct answer)
- Cover cost overruns beyond the loan amount
- Reduce the loan-to-value ratio at closing
Correct answer: Fund interest payments while the project generates no income
An interest reserve is built into the loan to cover interest charges during the construction phase before the project produces revenue.
Question 7: Which of the following best describes 'recourse' lending?
- The lender can only pursue the collateral if the borrower defaults
- The lender can pursue both collateral and the borrower's personal assets upon default (Correct answer)
- The loan is insured by a federal agency
- Interest rates are fixed regardless of market changes
Correct answer: The lender can pursue both collateral and the borrower's personal assets upon default
In recourse lending, the lender can pursue the borrower's personal or business assets beyond the pledged collateral if the collateral proceeds are insufficient.
CBP Credit Analysis and Lending 3
In a leveraged buyout (LBO) loan analysis, the primary repayment source is typically: