Types Of Loans

Question 1

Bridge Loan

Answer 1

Short term loan (several months) to cover until permanent financing can be achieved. Typically high interest is set.

Question 2

Term Loan

Answer 2

Loan repaid in regular payment over a set period of time.

Question 3

Revolver Loan

Answer 3

Loan facility allowing a borrower to borro up to a certain limit from month to month e.g. credit card.

Question 4

Leveraged Loan

Answer 4

Loan made to borrowers who already have high levels of debt and / or a low credit rating.

Question 5

Institutional Loan

Answer 5

Term loan where a portion is carved out for non bank institutional Investors. Typically priced higher due to longer maturity & bullet repayments.

Question 6

Project Finance

Answer 6

Loan that relies on a projects cashflow for repayment with the projects assets, rights and interests held as collateral.

Question 7

Discount Loan

Answer 7

Loan where interest and fees are deducted from the drawdown at the time it is paid to the borrow. E.g. £100 loan with £3 fees means borrower can access £97.

Question 8

Cap Ex

Answer 8

Loan to acquire assets or improve existing assets.

Question 9

VAT

Answer 9

Loan to finance VAT e.g. real estate asset acquisition

Question 10

Spot loan

Answer 10

Unconfirmed loans usually used by well known borrower’s for urgent / short term cash requests.

Question 11

Receivables due discounting

Answer 11

Loan where receivables due to a borrower (i.e. Seller) is given to the lender for a treasury advance.

With recourse = buyer pays seller
Without recourse = buyer pays lender

Question 12

Letter of credit

Answer 12

Document issued by a lender that guarantees a buyer of goods will pay the seller on time in full.

Question 13

Discounting a letter of credit

Answer 13

Buyers lender provides a % of the amount upfront if buyer wants to pay in the longer term.

Can be with or without recourse.

Question 14

Export Credit

Answer 14

Loan dedicated for enabling a commercial contract between a national supplier and a foreign buyer.

Export Credit Agencies guarantee the loan.

Question 15

What is Export Credit Agency Premium?

Answer 15

A few paid to ECA for being the guarantor. It can either be paid through a capital increase, interest increase or paid seperately by the borrower (all via a bank).

Question 16

What is stabilisation in Export Credit?

Answer 16

A principle that allows a borrower to get it’s export credit at a fixed interest rate (governed by int rules) and guarantees the lender a spread by the stabilisation agent.

If export credit rate > market rate, agent receives the difference from the stab agent.

Question 17

Swingline

Answer 17

A short term back up line of credit that can be called at a very short notice to cover shortfalls from other commitments.

It is usually part of the pool of the shortfall commitment (e.g. 3 lenders in first loan v 2 lenders in swingline).

Question 18

Structured Finance

Answer 18

Encompasses services that involve highly complex financial transactions offered for companies with unique financing requirements (e.g. aircraft build).

Question 19

What is the deal structure

Answer 19

Deal - Facility - Loan - Collateral (against either loan or facility)

Question 20

What is Originate to Distribute?

Answer 20

Selling positions in loans to buy side actors on the secondary market.

Can either sell full Treasury and Risk positions ( i.e. sub participant is sold a part of the deal) or just risk (i.e. sub participant act as a guarantor).

Question 21

What are the 2 trading strategies in loan trading?

Answer 21

Back to Back Trading: Buy & Sell in the same day.

Position Trading: keep a position in a portfolio for a short period (regulatory requirement to not hold for 3 months).

Question 22

What is the Plan Trading mechanism?

Answer 22

Buyer & Seller agree a price
Deal is agreed.
Sellers sends confirmation to the buyer
Deal is settled
2 Transfer certificates are sent to the Agent, one from both the Seller and the Buyer

Question 23

What fees are involved in loan trading?

Answer 23

Price variation fees paid to buyer (difference in market price v buyer price)

Delay compensation fees paid to seller

Cost of carry fees paid to buyer (incase of delay)

Breakage fee

Transfer fee

Question 24

What are the 4 types of interest rate?

Answer 24

Fixed
Repriceable (indexed on a market rate with repricing periods)
Variable (indexed on daily rates and repriced daily)
Structured (variable interest that is capped / floored)

Question 25

How can interest be paid?

Answer 25

In arrears - at the end of a cycle. In advance - at the start of a cycle.

Question 26

How is interest amount calculated?

Answer 26

Principal x IR(yearly) X time basis E.g. time basis actual number of days between 2 cycles / 365 (but can alter depending on currency and ISDA conventions.

Question 27

What are the 3 types of fees?

Answer 27

Upfront / Transfer fees Event / Agency fees Ongoing fees & Risk margin

Question 28

What are upfront & transfer fees?

Answer 28

Both are done on a deal level. Upfront fees are one time fees paid to the lender for its commitment to finance (e.f. arrangement fee). Transfer fees are one time fees paid by pool in event of transfer.

Question 29

What are Event / Agency fees?

Answer 29

Both done either at a facility or loan level. Event fees are one time fees based on specific events occuring during the credit (e.g. amendment fee).

Question 30

What are Ongoing fees & Risk margin.

Answer 30

Ongoing fees are charged to the borrower based on a portion of the commitment and usually paid quarterly (e.g. Utilisation fee) Risk Margin are fees to the risk taking sub-participant (borrower pays lender who pays sub-participant). Similar to interest rates they are defined by fee rate, amount of use, fee cycle and either paid in arrears or advance.

Question 31

What are funding costs?

Answer 31

Interest costs paid by the bank for the use of money (typically branch will pay the Treasury Desk)

Question 32

How are funding costs calculated?

Answer 32

Dependent on: - loan maturity - Funding cost of central banks - Market interbank rate (e.g. euribor) - Additional spread to charge for service costs, insurance etc. Most of the time it is simply market interbank + spread.

Question 33

What are notices?

Answer 33

Written documents that specifies terms and conditions of a loan and are generated / sent following certain events e.g. drawdowns, repayments etc.

Question 34

What are bills?

Answer 34

Document sent to the borrower by the host bank when a repayment is required.

Question 35

What is restructuring?

Answer 35

Reorganisation of outstanding obligations e.g. reducing burden of debt through rates paid by borrower.

Question 36

What is refinancing?

Answer 36

Replacement of existing obligation with a debt obligation under different terms.

Question 37

Why may refinancing be done?

Answer 37

Take advantage of better interest rate Consolidate debts into 1 Reduce monthly repayment amount Reduce alter risk (i.e. VaR to fixed) Free up cash

Question 38

What are club deals?

Answer 38

Deals which have been restructured following negotiations between borrower (debtor nation) and the Paris or London club.

Question 39

What is a agreement term sheet?

Answer 39

Restructure / refinance agreement terms made by borrower and lender.

Question 40

What is interest capitalisation?

Answer 40

Addition of all interest that has accrued to the principal loan amount. It's a contractual process that needs to be agreed by borrowers and lenders either at the start of during the lifecycle of the deal.

Question 41

What is PIK?

Answer 41

Payment In Kind - Loan that doesn't provide any cash flows from the borrower to lender between drawdown date and maturity date. PIK interest accrues and capitalises periodically over life of debt this increasing the underlying principal. PIK margin is a fee charged to borrower for the loan.

Question 42

What is the current UK interest rate and inflation rate?

Answer 42

Interest rate: 5.25% Inflation rate: 6.8%

Question 43

How does interest rate influence inflation rates?

Answer 43

Raising interest rates should decrease inflation rates, because less people are likely to borrow & will save more / spend less. This decreases demand and increases supply meaning prices decline / rise slower.

Question 44

What is the current US interest rate and I flatiron rate?

Answer 44

Interest rate: 5.5% Inflation rate: 3.2%

Question 45

What is the Agile delivery cycle?

Answer 45

User Requirements Functional Design Technical Design Development Testing Deployment Support

Question 46

What are the benefits of Agile and benefits of waterfall?

Answer 46

Agile: - Constantly developing and improving - Good for changing requirements - Decreased Risk - Easy to adapt Waterfall: - Good for initial deployments where requirements are unlikely to change. - Easier to map dependencies.

Question 47

What are the benefits of on prem and cloud?

Answer 47

On-Prem: - Complete control on data - Control of compliance Cloud: - No upfront cost, pay as you go model - Don't need internal resources - More flexibility and easier to scale

Question 48

What is the standard for user story and acceptance criteria writing?

Answer 48

User Story: - As a - I want - So that Acceptance Criteria: - Given that - When - Then -

Question 49

What are the largest assets, liabilities and equity on a bank's balance sheets?

Answer 49

Current Assets: - Receivables from Customers Non-Current Assets: - Buildings, Equipment Current liabilities: - Short term loans, accounts payables Non-Current liabilities: - long term loans, long term leases Equity: - Stocks - Capital Requirements Assets = Liabilities + Equity