Commercial Lending Final Exam

1. Facial recognition technology can predict a person’s political orientation with a

72% accuracy.

2. Reading the Hunger Games has been found to reduce prejudice and promote

collective action on behalf of disadvantaged groups.

3. Extroverts tend to use more Emojis

4. Computers can tell how Bored you are.

5. In the average conversation, people typically hold eye contact for 61% of the time.

6. Having a high degree of confidence is the most influential factor for professionals

who want to earn the trust of potential clients!

7. According to a major study done by Carnegie Mellon University, a professional’s

confidence is more important than that professional’s reputation, skill set, or

history! As humans, we are constantly looking for winners.

8. When people first meet, the EYES are the first part of the body people first notice!

9. People who are fake annoy others the most!!!

10. Making someone feel “Powerful” is the best way to improve their mood.

11. The best way to get someone agree with you is to make them laugh.

12. The best way to show someone you care about them is to get them a gift.

13. 35% to 50% of our personality comes from our genes.

14. “Never bite the hand that feeds you.” is true about people!

15. Where people exit the bar is the best place to stand at a networking event.
16. The Board of directors of the bank is responsible for establishing bank policies

including loan policy.

17. The Time value of money identifies the concept that a dollar received today is worth

more than a dollar received in the future.

18. Before proceeding to liquidate the collateral, Confirming the bank's rights to

collateral is the step that involves careful review of loan documents to ensure the

bank has a valid security interest.

19. Within the steps to resolving a problem loan, until a borrower has been tested by

adversity, it is difficult to measure a borrower’s true character.

20. A Major gap between gross and net sales is a financial early-warning signal

directly involving the borrower’s income statement.

21. Loan origination for industries that are not understood by leander is a situation

that causes problem loans for a bank.

22. Misleading is an attempt to lower the loan pricing, when a customer falsely states

that another bank has made a better offer. This is an example of a misleading

negotiating tactic.

23. Better locations and superior products will help or improve a bank's negotiating

leverage

24. A business banker must keep in mind the goals and needs of both the bank and the

customer in a customer-bank negotiation.

25. When matching loan terms to the appropriate index, the Prime rate, adjusted as

prime adjusts index should be used for short-term loans and lines of credit that will

mature in one year or less, generally at a variable rate. (

26. Bad-faith negotiation is a negotiation tactic involves a customer negotiating with

one bank but intending to do business with another bank.

27. Some business bankers grow too close to their customers and cannot appraise the

situation objectively to resolve a problem loan, that is why it is important to

reevaluate the business banker, which is step two of the banking process.

28. Involvement of multiple financial service providers tends to help improve the

customer’s negotiating leverage.

29. A Mature business borrower will usually be a more vigorous negotiator.

30. The general partner in a limited partnership, is automatically authorized to borrow

money.

31. A business banker can establish the authority who can borrow if the customer is

a sole proprietor is to obtain a copy of Schedule C from Form 1040.

32. A key factor for utilizing cash surrender value of life insurance as collateral is

establishing the owner.

33. Prior to establishing rights to the collateral, a business banker must identify the

ownership and type of collateral to create a bank's interest in property that secures a

loan.

34. Events of Default section of the loan agreement includes language regarding the

borrower failing to make any due payments on the loan or any other indebtedness to

the bank.

35. Controllability is a factor that involves the ability of a bank to locate and hold

collateral.
36. Collateral is a ready source of support and the secondary source of repayment for

commercial loans made by a community bank often provide funds for borrowers to

acquire assets.

37. A Banker's acceptance presents the name of the underlying obligation from one bank

to pay another that is created by a documentary letter of credit.

38. Concentrations is a term for high levels of sales to a single customer or group of

customers and should be limited in a borrowing base.

39. A type of collateral that are seasonal products, shelf life, and method of valuation key

issues is Inventory.

40. Non-publicly traded securities are an asset as collateral that is characteristically

difficult to value.

41. Evidence of collateral is the documentation requirement that is met when a security

agreement and financing statement are used to document the loan.

42. When granting a commercial loan request, to determine the legal structure and

identify the parties that legally represent the borrower a business banker must obtain

the partnership or corporate resolution and or the partnership or corporate

certificate of authority

43. Representations and warranties in the loan agreement section attests those

certain statements the borrower has made are true.

44. Violating a loan covenant usually is an event of default in a promissory note or loan

agreement.

45. When the borrower rents the space where the business is located When is a lessor’s

agreement always justified as part of the documentation to support a loan.

46. At the loan signing and closing, is the point during the loan process that is the ideal

time to make sure that all the documents are complete and correct.

47. The guarantor appears to have more financial strength than the collateral of the

borrower is a situation a personal guarantee typically classified as a secondary

source of repayment.

48. Orderly liquidation value valuation method is preferred by bankers for equipment

appraisals.

49. The lender can anticipate the types of borrowing needs based on a borrower’s

industry, therefore, is it important for a lender to understand cash flow cycles by

industry type.

50. Inability to meet commitments on schedule, is a borrower’s nonfinancial early-

warning signal of a problem loan.

51. A Banker's acceptance (BA) is a negotiable piece of paper that functions like a post-

dated check. A bank, rather than an account holder, guarantees the payment. Banker's

acceptances (also known as bills of exchange) are used by companies as a relatively

safe form of payment for large transactions. BAs can also be short-term debt

instruments, like U.S. Treasury bills, that trade at a discount to face value in the

money markets.

KEY TAKEAWAYS

 The banker's acceptance is a form of payment that is guaranteed by a bank rather

than an individual account holder.

 The bank guarantees payment at a later time.

  BAs are most frequently used in international trade to finalize transactions with

relatively little risk to either party.

 Banker's acceptances are traded at a discount in the secondary money markets.

 Thus, unlike a post-dated check, BAs can be investments that are traded,

generally at a discounted price (similar to Treasury bills).

52. Understanding Banker's Acceptance: For the company that issues it, a banker's

acceptance is a way to pay for a purchase without borrowing to do so. For the

company that receives it, the bill is a guaranteed form of payment. A banker's

acceptance requires the bank to pay the holder a set amount of money on a set date.

 BAs are most issued 90 days before the date of maturity but can mature at any

later date from one to 180 days. They are typically issued in multiples of

$100,000.

 BAs are issued at a discount to their face value. Thus, like a bond, they earn a

return. They also can be traded like bonds in the secondary money market.

There is no penalty for cashing them in early, except for the lost interest that

would have been earned had they been held until their maturity dates.

53. History of Banker’s Acceptance

 Banker’s acceptances have been around since the 12th century. Just like now,

BAs were used as a method of facilitating trade. In the 18th and 19th

centuries, BAs started to become an actively traded market in London.

 The U.S. launched the Federal Reserve in the early 1900s to help create

banker’s acceptances that compete with London’s. The Fed’s goal was to
 boost U.S. trade and it was given the authority to purchase certain BAs. While

the Fed still buys government bonds, it no longer buys BAs.

 Banker’s Acceptance as Checks

 Banker's acceptances, like certified checks, are a relatively safe form of

payment for both sides of a transaction. The money owed is guaranteed to be

paid on the date specified on the bill.

 The use of BAs is most common in international trade transactions. A buyer

with an importing business can issue a banker’s acceptance with a date after a

shipment is due to be delivered, and the seller with an exporting business will

have the payment instrument in hand before finalizing the shipment.

 The person who is paid with a banker's acceptance may hold onto it until its

maturity date in order to receive its full value or can sell it immediately at a

discount to face value.

54. Banker's acceptances are a relatively safe form of payment for both sides of a

transaction.

 Unlike a regular check, a banker’s acceptance relies on the creditworthiness of

the banking institution rather than the individual or business that issues it. The

bank requires that the issuer meet its credit eligibility requirements, typically

including a deposit sufficient to cover the banker’s acceptance.

 Banker’s Acceptance as Investments

 Banks and institutional investors trade banker's acceptances on the secondary

market before they reach maturity. The strategy is similar to that used in
 trading zero-coupon bonds. The BA is sold below face value, at a discount

determined by the length of time before the maturity date.

 Banker's acceptances are considered to be relatively safe investments because

the bank and the borrower are liable for the amount that is due when the

instrument matures.

55. Advantages and Disadvantages of a Banker’s Acceptance

 One of the key advantages of a banker’s acceptances is it’s backed by a

financial institution (i.e., protected against default). This gives the seller

assurances related to payment. Meanwhile, buyers are afforded the ability to

make purchases in a timely manner and not worry about having to make

payments in advance.

 Now, the key risk is that the financial institution will have to make good on

the promised payment. This is the key risk for the bank. To help hedge against

this, the bank may require the buyer to post collateral.

 Pros

- It provides the seller assurances against default.

- The buyer doesn’t have to prepay or pay in advance for goods.

- It provides the ability to purchase and sell goods in a timely manner.

- It has a relatively low cost compared to the hedge or benefit provided.

 Cons

- The bank may require the buyer to post collateral before issuing the

banker’s acceptance.
 - The buyer may default, forcing the financial institution to make the

payment.

- Banker’s Acceptance FAQs

56. How Does a Banker's Acceptance Work?

 For a banker’s acceptance, the importer will seek to make a purchase from

an exporter (generally in another country). The exporter wants assurance

of payment, but the importer also wants assurance that the seller can

deliver. Banker’s acceptance is a form of payment backed by a bank that

eliminates transaction-related risks for the importer and exporter.

57. Is a Banker's Acceptance a Money Market Instrument?

 Banker's acceptances are money market instruments and, like most money

markets, are relatively safe and liquid, particularly when the paying bank

enjoys a strong credit rating.

58. What Is a Banker's Acceptance Rate?

 Banker’s acceptances are assumed to be safe investments as they’re backed by

the bank, which means they often trade at a discount to face value. The

banker’s acceptance rate is the market rate at which these instruments trade.

It’s the return an investor would receive if they purchased today and held until

the payment date.

59. What Is the Difference Between Banker’s Acceptance and Commercial Paper?

 Commercial paper is a promissory note that pays a fixed rate. It’s unsecured

and can be for a few days or years. Commercial paper is generally used to

cover short-term obligations (such as the cost for a new project) or short-term
 receivables. BAs are also short-term promissory notes, although they have the

unconditional guarantee of a bank and are often used for trade.

60. The Bottom Line

 From an investment perspective, banker’s acceptances are relatively safe

investments being money market investments and inline with T-bills from a

risk-return perspective. For importers and exporters, BAs help boost trade by

reducing transaction-related risks.