Part -1:

1. Discuss which is more expensive for a bank: Extending credit to a customer who ultimately defaults, or denying credit to a customer who would have paid the bank back.

2. Can a firm continue to operate for extended periods of time with negative cash flows from investing? Cash flows from financing? Cash flows from operations? Why or why not?

3. Why is it important to compute pro forma common size balance sheets and income statements when evaluating a commercial loan?

4. Explain how sensitivity analysis assists in evaluating commercial loan requests.

5. Explain how an increase in days inventory on hand and an increase in days accounts payable outstanding would impact a firm's operating cash flow.

6. What are the five generally accepted credit events that can trigger a payment from the seller of a credit default swap to the buyer?

Part -2:

1. Discuss why some are concerned at the recent increase in both credit card debt and personal bankruptcies.

2. How do banks use credit-scoring models? If you were developing such a model, what factors do you think would be important in determining if an applicant is a good credit risk?

3. Discuss the major differences between consumer and commercial loans.

4. Which is more expensive for a bank: 1. Making a loan to a customer that does not pay the loan back or 2. Denying a loan to someone who would have paid the bank? Explain your answer.

5. What are "high LTV" loans and why are they riskier than "low LTV" loans?

Part -3

1. What are the major differences between a values-driven credit culture and a market-share driven credit culture?

2. Flow does a firm's seasonal working capital needs differ from its permanent working capital needs?

3. Discuss how banks benefit from the creation of the secondary mortgage market.

4. Discuss how seasonal working capital needs differ from permanent working capital needs.

5. Discuss the five Cs of good credit and the five Cs of bad credit