CBP Financial Analysis and Credit Management 3

Question 1

What is the purpose of a loan-to-value (LTV) ratio in real estate lending?

Accepted Answer

To assess collateral coverage relative to loan amount

Answer

LTV measures the loan amount as a percentage of the property's appraised value, indicating how much equity cushion exists to protect the lender in case of default.

Question 2

In credit scoring, which factor typically carries the MOST weight in a FICO score calculation?

Accepted Answer

Payment history

Answer

Payment history accounts for approximately 35% of a FICO score, making it the single most influential factor in the calculation.

Question 3

A bank is reviewing a commercial loan where the borrower's interest coverage ratio is 1.1x. How should the credit analyst interpret this?

Accepted Answer

The borrower barely covers interest expense, indicating elevated risk

Answer

An interest coverage ratio of 1.1x means the borrower earns only 10% more than its interest obligations, leaving very little buffer for earnings deterioration.

Question 4

Which type of credit facility provides a borrower with the ability to draw, repay, and redraw funds up to a specified limit?

Accepted Answer

Revolving credit facility

Answer

A revolving credit facility allows flexible drawdowns and repayments within the credit limit, making it suitable for working capital needs.

Question 5

When a bank assigns an internal credit rating to a borrower, what is the primary purpose?

Accepted Answer

To estimate the probability of default and set loan pricing and reserves

Answer

Internal credit ratings estimate the likelihood of default, which drives loan pricing (spread), loss provisioning, and regulatory capital allocation under Basel frameworks.

(CBP) Certified Banking Professional Practice Test

(CBP) Certified Banking Professional Practice Test

CBP Financial Analysis and Credit Management 3