Name: Class: Date:

CHAPTER 07—BANK LOANS

1. Personal loans do not require the borrower to state a specific purpose for the funds.
a. True
b. False

2. Secured loans are sometimes called signature loans.

a. True
b. False

3. Balance sheets for all banks are private documents seen only by bank management.
a. True
b. False

4. The three general categories of loans are consumer loans, commercial loans, and mortgage loans.
a. True
b. False

5. Subprime rates are higher-than-normal interest rates offered to a less-than-perfect credit applicant.
a. True
b. False

6. If a credit applicant has opened many new accounts recently, that is probably a sign that the applicant is
very creditworthy.
a. True
b. False

7. Paying off a loan early saves the consumer no money if the sum-of-digits method has been used to compute finance

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Name: Class: Date:

CHAPTER 07—BANK LOANS

charges.
a. True
b. False

8. One consequence of credit overextension is a ruined credit rating.

a. True
b. False

9. High consumer debt is good for banks, because banks make most of their money from the interest paid on loans.
a. True
b. False

10. The term moral hazard means that consumers with poor moral character are a high credit risk.
a. True
b. False

11. Keeping large amounts of currency on hand as protection against possible increases in customers’ demand
for withdrawals reduces a bank’s ability to make profits from loans.
a. True
b. False

12. A lending policy is a written statement of the guidelines and standards a bank must follow in making credit
decisions.
a. True
b. False

13. All of the following are considered installment loans except

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 a. automobile loans.
b. home equity loans.
c. education loans.
d. lines of credit.

14. A legal claim a lender has on property to secure a debt is called

a. a lien.
b. collateral.
c. an acceleration clause.
d. a garnishment.

15. Which of the following is NOT an example of an account service fee?

a. certified check fee
b. fee for returned checks
c. financing fee
d. verbal funds transfer fee

16. Which of the following statements about open-end loans is true?

a. An automobile loan is probably the most common type of open-end loan.
b. The longer you use the money, the more you pay.
c. The amount owed is fixed.
d. The term is fixed.

17. Which of the following shows the steps of the credit-approval process in proper order?
a. underwriting, application, documentation, processing, closing, funding
b. documentation, application, underwriting, closing, processing, funding
c. application, processing, documentation, underwriting, closing, funding
d. application, documentation, processing, underwriting, closing, funding
18. Which of the following elements of the FICO credit-scoring system carries the most weight?
a. types of credit
b. payment history
c. length of credit history
d. new credit

19. This finance charge method takes the total finance charge, divides it by the number of months in the loan term,
and assigns a higher ratio of interest to the early payments.
a. previous balance method
b. average daily balance method
c. sum-of-digits method
d. adjusted balance method

20. Documentation of most credit problems stays in a consumer’s file for at least
a. six months.
b. one year.
c. five years.
d. seven years.

21. The concept that the borrowers who are most willing to accept a high interest rate are the same borrowers who
are most likely to default on their loans is called
a. moral hazard.
b. captive borrowers.
c. adverse selection.
d. asset transformation.

22. The risk that a bank will have to sell its assets at a loss to meet its cash demands is called
a. credit risk.
b. market risk.
c. liquidity risk.
d. security risk.
23. A(n) loan is a loan for which the amount of the payments, the rate of
interest, and the number of payments are fixed.

24. A home equity loan is essentially a second .

25. When banks refuse to provide a loan, or when they lend less than the customer
requested, they are engaging in .

26. The amount you borrow in a loan is called the

.

27. A(n) period is an amount of time you have to pay a credit card bill in full
and avoid any finance charges.

28. The process of reviewing a loan for

soundness is called _ .

29. are records of all who have requested a copy of a credit report within the last year.

30. The annual rate is the amount of interest charge on a loan principal
expressed as a yearly figure.
31. Services provided by banks that generate revenue but that are not included on their balance sheets are called
.

32. refers to using deposits to generate revenue by putting deposits to work via loans.

33. Specific property that secures a loan is called .

34. Suppose you borrow $1,000 and pay the loan back in 12 equal payments of $95.50. What is the finance charge for
this loan?

35. Suppose you borrow $5,000 and make 12 equal payments to retire the debt. If the finance charge for the loan is
$400, what will the amount of each monthly payment be?

36. Becky has a balance of $2,000 on her credit card. The minimum payment requirement is 4%. How much is
the minimum payment?

37. Markita has a balance of $3,400 on her credit card. The minimum payment requirement is 5%, and the card's
APR is 17%. If she makes the minimum payment, how much of it will go toward paying the interest? Round your
answer to the nearest hundredth.

38. Dominic has a balance of $1,460.20 on his credit card. The minimum payment requirement is 6%, and the card's
APR is 18%. If he makes the minimum payment, how much of it will go toward reducing the balance? Round your
answer to
the nearest hundredth.

39. What are home equity loans based upon?

40. What is a finance charge?

41. What is an acceleration clause?

42. What occurs during a loan closing?

43. What is a consumer reporting agency?

44. What does securitization mean?

45. How can a bank limit credit risk?

46. Explain the difference between secured and unsecured loans.

47. What is a line of credit?

48. What are the “three Cs” that underwriters use to evaluate loan applications? Briefly define them.

49. For a bank, what is liquidity? What are some loan factors that affect a lending bank’s liquidity?

50. Explain what it means to be a captive borrower.