MCQ SET 1

Question 1 1 of 1 points
Match the definition of the five C's of credit review

1. Character
2. Capacity
3. Capital
4. Collateral
5. Cash Flow

i. Only applicable to secured loan; will be liquidated to settle outstanding

loan.
ii. Profile of the applicant.
iii. Matching timing of income receipt against repayment of loan.
iv. Applicant's initial investment.
v. Amount of income and source of income.
Selected Answer: D. 1 - ii, 2 - v, 3 - iv, 4 - i, 5 - iii
Correct Answer: D. 1 - ii, 2 - v, 3 - iv, 4 - i, 5 - iii
Feedback: Correct

Five C's of credit review

1. Character - Profile of the applicant

2. Capacity - Amount of income and source of income
3. Capital - Applicant's initial investment
4. Collateral - Only applicable to secured loan; will be liquidated to
settle outstanding loan

5. Cash Flow - Matching timing of income receipt against

repayment of loan
Question
0 of 1 points
2
Under the Federal Reserve System, who is responsible for setting the discount rate?
Selected Answer: C. 12 Federal Reserve Banks
Correct Answer: A. Board of Governors
Feedback: Wrong

1. The Board of Governor is responsible for SETTING the

 reserve requirement ratio AND the discount rate.
2. The 12 Federal Reserve Banks is responsible
for RECOMMENDING the discount rate.

3. The Federal Open Market Committee (FOMC) is responsible

for open market operations.
Question
1 of 1 points
3
Which of the following statement is TRUE?

1. Credit card facilities and study loans are amortizing loans.

2. Mortgage loans and overdrafts are revolving loans.
3. When a purchase is made with a debit card, funds are debited from the
cardholder's account.
4. When a purchase is made with a credit card, funds are deposited into the
cardholder's account.

5. Cash advance is a secured revolving loan.

Selected Answer: A. 3
Correct Answer: A. 3
Feedback: Correct

An amortizing loan: One-time disbursement, requires periodic

payment of interest and principal till the loan is fully repaid. eg.
Mortgage loans, auto loans, study / tuition fee loans

A revolving loan: A credit facility which allows the borrower to draw

within the limit approved. Interest is charged only on utilization.
Monthly repayment consists of interest charged and part of the
principal amount. eg. credit cards, overdrafts

A secured loan: A loan granted to a borrower and backed by collateral

pledged to the bank. If the borrower defaults, the bank will dispose the
collateral for settlement of outstanding loan. eg mortgage loans, auto
loans

An unsecured loan: A loan granted to a borrower based on his credit

worthiness. eg credit cards, charge cards and unsecured revolving
line.

Debit card: When a purchase is made, funds are debited from the
 cardholder?s account.

Credit card: A credit facility granted to customers. Purchases made

now are paid-off later.

Cash advance: A loan facility where banks allow consumers to obtain

(borrow) cash through the credit card account

Question
0 of 1 points
4
Which of the following is a function of MONEY?

1. Medium of Exchange
2. Store of value, hold value for future use
3. Unit of account
4. Highly liquid and widely accepted
5. Best hedge against inflation

Selected Answer: B. 1, 2 and 4

Correct Answer: C. 1, 2, 3 and 4
Feedback: Wrong

Functions of money include:

1. Medium of exchange: Accepted in exchange for goods and

services
2. Store of value: Widely accepted and very liquid. It holds value
for future use but may not be the best hedge against inflation.
Other assets such as property or financial assets (eg stocks)
may provide better returns.

3. Unit of account: A measure to determine the value of goods

and services.
Question
1 of 1 points
5
In the loan application process, which of the following are objectives of the pre-
screening stage?

1. Identify fraudulent applications

 2. Review minimum / maximum age of applicants
3. Reject applicants with poor credit history or bankruptcy records

4. Reject applicants failing to meet minimum income

Selected Answer: B. All of the above
Correct Answer: B. All of the above
Feedback: Correct

Objectives of the pre-screening stage are:

1. Identify fraudulent applications

2. Review minimum / maximum age of applicants
3. Reject applicants with poor credit history or bankruptcy
records

4. Reject applicants failing to meet minimum income

Question
1 of 1 points
6
Judy intends to take a loan of $10,000 for 10 years. UOD Bank charges 8% per
annum for an unsecured loan. Compute the monthly installment Judy needs to pay
for the loan.

PVIFA 8%, 10 = 6.7101

Selected Answer: D. $124
Correct Answer: D. $124
Feedback: Correct

Pann = Loan Amount / PVIFA 8%, 10 = 10,000 / 6.7101 = $1,490

Pmon = Pann /12 = $1,490 /12 = $124

Question
1 of 1 points
7
Jacob resides in Ponyo Land. He recently receives a payment of $10,000 from a
buyer and deposits the amount in a bank. How much money can be created in the
economy if Ponyo Land's central bank sets a reserve requirement ratio (RRR) of
8%?
Selected Answer: B. $125,000
Correct Answer: B. $125,000
 Feedback: Correct

Amount created = Initial amount * (1/RRR)

Note: 8% RRR = 0.08

Question
1 of 1 points
8
Shaun deposited a cheque on Mon at 4pm. When will the cheque be cleared?
Selected Answer: A. Wednesday, 2pm
Correct Answer: A. Wednesday, 2pm
Feedback: Correct

Cheque clearing process:

1. Deposited BEFORE the cut-off time of 3pm - cleared at 2pm

on next working day. eg A cheque deposited on
Monday before 3pm will be cleared on Tuesday 2pm.
2. Deposited AFTER the cut-off time of 3pm - cleared at 2pm
on the 2nd working day from day of deposit. eg A cheque
deposited on Monday after 3pm will be cleared on Wednesday
2pm. A cheque deposited on Friday after 3pm or Saturday will
be cleared on Tuesday at 2pm.

3. 5-day clearing week (Monday to Friday)

Question
1 of 1 points
9
How does Open Market Operations affects money supply AND interest rate?
Selected C. Buying of government securities - Money supply increase,
Answer: Interest rate decrease
Correct C. Buying of government securities - Money supply increase,
Answer: Interest rate decrease
Feedback: Correct

1. Open Market Operations (OMO): Influence liquidity and

interest rates through buying and selling of government debt.
Buying of government securities increase money supply and
decrease interest rates. Selling of government
securities decrease money supply and increase interest rates.
2. Discount rates: Interest rates charged on loans granted by
central banks to illiquid financial institutions. Higher discount
rates decrease money supply and increase interest rates. Lower
 discount rates increase money supply and decrease interest
rates.

3. Required Reserve Ratio (RRR): Amount of capital financial

institutions need to maintain for contingency purpose. Higher
RRR decrease money supply and increase interest rates. Lower
RRR increase money supply and decrease interest rates.
Question
0 of 1 points
10
Which of the following term describes the imposition of higher interest rates on
less credit worthy borrowers?
Selected Answer: D. Moral hazards
Correct Answer: C. Risk-based pricing
Feedback: Wrong

1. Asymmetric information - Imperfect information: a situation

in which one lender is aware of the poor credit history of a
loan applicant but another lender is not.
2. Adverse selection - Granting a loan to a borrower less credit
worthy than he appears to be.
3. Risk based pricing - Imposing/Charging higher interest rates
on less credit worthy borrowers.

4. Moral hazards - Borrowers use funds for undesirable

activities.