CBP Credit Analysis and Lending 2 — Questions and Answers
Question 1: Which financial ratio best measures a borrower's ability to service debt from operating cash flow?
- Current ratio
- Debt service coverage ratio (DSCR) (Correct answer)
- Quick ratio
- Price-to-earnings ratio
Correct answer: Debt service coverage ratio (DSCR)
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:
- A type of collateral pledge
- A contractual condition borrowers must maintain (Correct answer)
- A government regulation on loan limits
- A credit bureau scoring model
Correct answer: A contractual condition borrowers must maintain
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:
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Net income minus dividends
- Long-term debt minus equity
Correct answer: Current assets minus current liabilities
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?
- Term loan with fixed monthly payments
- Revolving line of credit (Correct answer)
- Balloon payment mortgage
- Equipment finance agreement
Correct answer: Revolving line of credit
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:
- Accounts receivable
- Cash and cash equivalents
- Inventory (Correct answer)
- Short-term investments
Correct answer: Inventory
The acid-test (quick) ratio excludes inventory because it is the least liquid current asset and may not be quickly converted to cash.
Question 6: When a lender takes a 'second lien' position on collateral, it means:
- The lender has the primary claim on the asset
- The lender's claim is subordinate to a first-lien holder (Correct answer)
- The lender waives all rights to the collateral
- The collateral is valued at 50% of market value
Correct answer: The lender's claim is subordinate to a first-lien holder
A second lien holder is paid only after the first lien holder is fully satisfied in the event of default or liquidation.
Question 7: Which credit risk concept refers to the total exposure a bank has to a single borrower or related group?
- Concentration risk (Correct answer)
- Counterparty risk
- Systemic risk
- Residual risk
Correct answer: Concentration risk
Concentration risk arises when a large portion of credit exposure is held with a single borrower or correlated group, amplifying potential losses.
CBP Credit Analysis and Lending 2
Which financial ratio best measures a borrower's ability to service debt from operating cash flow?