PB3 - RETAIL LENDING MOCK 2 EXAMINATION

SECTION B: SIXTY (60) INDEPENDENT MULTIPLE-CHOICE QUESTIONS

ANSWER ALL QUESTIONS IN THIS SECTION

1. A customer has applied for a 2-year personal loan with flat-rate interest that is
discounted on an up-front basis.

If the loan amount is RM200,000 and the interest rate is 6%,what would be the
monthly installment?

A. RM8,333.33.
B. RM9,333.33.
C. RM7,333.33.
D. RM17,666.67.

2. What is the term used to describe the practice of financial institutions providing
bridging loans to property developers to finance a residential project in addition to
arranging to finance the houses purchased by the prospective buyers as an overall
facility package?

A. Package financing.
B. Development financing.
C. Cross-purpose financing.
D. End-purchase financing.

3. Which one of the following is NOT a non-landed property?

A. A condominium.
B. An apartment.
C. A semi-detached house.
D. A flat.

4. A customer is keen to purchase her first property. As a potential buyer, she conducts
a survey of the developer prior to committing to the purchase.

Which of the following should the survey include?

I. Establishing the financing standing, past performance and reputation of the

developer.
II. Ascertaining that the developer has a valid licence in respect of the property
advertised.
III. Ascertaining that the developer has a valid advertising permit issued by the
Ministry of Housing and Local Government.

A. I only.
B. I and II only.
C. I, II and III only.
D. II and III only.

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5. Which of the following would give the regular instalment payment in relation to a home
loan?

A. Outstanding loan capital

Annuity discount factor

B. Outstanding loan capital

Annuity compound factor

C. Outstanding loan capital x (1 + Interest rate)

Annuity compound factor

D. Outstanding loan capital x (1 + Interest rate)

Annuity discount factor

6. Which of the following risks is NOT a prevalent risk for the bank if the property
financed is a completed property that has been handed over to the borrower?

I. Credit risk.
II. Security risk.
III. Developer risk.
IV. Legal risk.

A. I and II only.
B. III and IV only.
C. II, III and IV only.
D. III only.

7. In the context of using an overdraft facility as property financing, which of the following
statements is FALSE?

A. Such a facility enables the borrower to draw funds from the facility up to the
overdraft limit granted for his or her use and to credit funds into the account at
any time.
B. Interest for such a facility is calculated based on the daily outstanding balance.
C. An overdraft facility as property financing is repayable on demand.
D. Repayment of such a facility is based on the borrower repaying fixed monthly
instalments.

8. The process of calculating the amount of interest to be applied to a lending facility

once a month based on the previous month's balance is known as calculating interest
on:

A. a quarterly rest basis.

B. a monthly rest basis.
C. a daily rest basis.
D. an annual rest basis.

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9. A customer is purchasing his first home and would like to obtain a 30-year housing
loan to finance the purchase. As he is a salary earner with a stable income, he would
like to pay fixed monthly installments. Also, he has a view that interest rates are likely
to rise in coming years.

What type of housing loan would you recommend to this customer?

I. Non-revolving term loan.

II. Floating rate.
III. A loan structured with an overdraft facility.
IV. Fixed rate.

A. I, II and III only.

B. I, III and IV only.
C. I and IV only.
D. III and IV only.

10. Which of the following is likely to result in a higher loan pricing?

I. Increased competition.
II. Reduction in deposit market rates.
III. Slowdown in economic growth.
IV. Customers having ready and easy access to loan pricing information of
various banks.

A. I and III only.

B. II and III only.
C. II and IV only.
D. None of the above.

11. Which of the following Shariah principles are typically used in home financing?

I. Bai’ Bithaman Ajil.

II. Bai’ Al-tawarruq.
III. Musharakah Mutanaqisah.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

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12. Which of the following statements regarding hire purchase is TRUE?

I. For fixed rate HP agreements, the term charges are not to exceed the rate
prescribed by the Hire Purchase Act for Scheduled goods, which is 10% per
annum flat rate.
II. The maximum financing under hire purchase is 95% of the cash price of the
goods.
III. In a hire purchase arrangement, the hirer may opt for early full settlement.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

13. A customer has taken up a fixed rate hire purchase facility. The cost of goods is
RM150,000 and the customer has paid a deposit of RM20,000. Thus, the loan
amount is RM130,000.

If the hiring period is 5 years and the rate of interest is 6% p.a., how much would be
the total term charges assuming that the customer paid each installment on time?

A. RM 10,500.
B. RM 39,000.
C. RM 45,000.
D. RM 2,816.67.

14. An established company with a solid track record in its management, profitability and
dividend payouts, and is well positioned in the market is referred to as:

A. A unit trust company.

B. A high yield company.
C. A blue chip company.
D. A preferred stock company.

15. Which of the following are characteristics of speculative shares?

I. The company is well established with a proven track record.

II. Their price often reflects anticipation of future growth potential, rather than
current earnings.
III. The share price can be volatile.

A. I and II only.
B. I and III only.
C. I, II and III only.
D. II and III only.

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16. Which of the following are goods that are covered in the First Schedule of the Hire
Purchase Act 1967 (i.e. Act Goods)?

I. An LCD television for home use.

II. A bicycle for personal use.
III. A motorcycle for business use.
IV. An aircraft.

A. I and III only.

B. I, II and III only.
C. II and III only.
D. All of the above.

17. Which of the following will result in an increase in the cost of funds for a bank?

I. A fall in the bank’s current account deposits.

II. An increase in the Statutory Reserve Ratio.
III. A fall in the bank’s administration costs.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

18. Which of the following strategies or methods may be used to increase a bank’s non-
interest income?

I. Increase the interest rate spread on existing loans.

II. Focus on increasing the sale of wealth management products, such as unit
trust and investment-linked insurance.
III. Reduce the commitment fee charged on unutilized overdraft lines.

A. I and II only.
B. I and III only.
C. II only.
D. II and III only.

19. In relation to Islamic debit cards, which of the following statements is FALSE?

A. Islamic debit cards provide credit facilities to customers which use them.
B. Islamic banks may charge a fee for the use of a debit card to cover the cost of
issuing the card and other expenses.
C. Under Shariah law it is permissible to issue debit cards provided that the
cardholder does not exceed the balance available on the account and no
interest charge arises out of the transaction.
D. An Islamic debit card enables the customer to withdraw cash from their
accounts.

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20. A company wishes to lease industrial equipment from a dealer. If both parties were to
enter into an Islamic contract for this arrangement, which Shariah concept will be
applied?

A. Bai’ Al-Inah.
B. Musharakah Mutanaqisah.
C. Ijarah.
D. Murabahah.

21. Which principle of lending is a credit officer adhering to when ensuring that security
obtained from a borrower in relation to a lending agreement is of adequate value and
is legally enforceable?

A. The principle of pari passu.

B. The principle of protection.
C. The principle of control.
D. The principle of tenor matching.

22. In order to mitigate market risk, which of the following risks must a financial institution
be cognizant of and manage?

I. Foreign exchange risk.

II. Equity risk.
III. Legal risk.
IV. Interest rate risk.

A. I and II only.
B. I, II and IV only.
C. II and III only.
D. All of the above.

23. Which of the following statements is FALSE?

A. Information provided on the loan application form should not be accepted

at face value, and should be verified.
B. A potential warning signal when assessing an application is that the
information provided do not appear to be consistent with the age of the
applicant.
C. The applicant’s character may be in question if he appears to have adequate
income but has a chronic delinquent history.
D. Obtaining and verifying the applicant’s income tax returns is a vital measure to
ensure the applicant has adequate collateral.

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24. Which of the following statements is FALSE?

A. Generally, lenders prefer a legal charge over an equitable charge, as a legal

charge secures legal interest in the property and can be enforced without a
court order.
B. An assignment is commonly used when properties are taken as security.
C. A pledge refers to a transfer of a movable asset where possession of the
asset is passed on the pledgee but the legal ownership remains with the
pledgor.
D. A pledge is a common form of security taken when lenders are extending
overdrafts and share margin financing.

25. Which of the following approaches to credit evaluation is likely to provide the MOST
accurate results?

A. An evaluation based on the CAMPARI model.

B. An evaluation based on the Five C model.
C. An evaluation based on the credit scoring model.
D. An evaluation based on a combination of the above three models.

26. The purchase of which of the following would you not expect to be funded using the
proceeds of a retail loan?

A. Household appliances.
B. Vehicles.
C. Home renovation.
D. Office supplies.

27. The measure of the ability of an individual, business enterprise or government

authority to obtain present value in the form of money or guarantees while deferring
payment to a definite future time, most closely describes which of the following?

A. Risk.
B. Credit.
C. Indemnification.
D. Hypothecation.

28. Which of the following is the first stage of the credit process cycle?

A. New loan origination.

B. Credit verification.
C. Marketing plan development.
D. Credit evaluation.

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29. Which of the following is NOT measured during the credit evaluation phase of the
credit process cycle?

A. The authenticity and accuracy of all the data supplied by a customer in

support of their loan application.
B. The character of the borrower.
C. The purpose of the loan.
D. The primary method of repayment.

30. Banks lend at base lending rate plus a spread, in order to mitigate what type of risk?

A. Recovery risk.
B. Default risk.
C. Interest rate risk.
D. Fraud risk.

31. Which of the following statements is FALSE?

A. A guarantee means an undertaking by a party to the lender to make

repayment in the event the borrower defaults.
B. It is the norm for personal guarantees to be obtained from directors and
primary shareholders for loan facilities that are extended to publicly listed
companies.
C. Obtaining personal guarantees from directors that are also significant
shareholders is a measure to ensure the directors’ commitment in managing
the business responsibly.
D. Save for an exempt private company, a company is not allowed to give
guarantees on behalf of unrelated companies unless it can be proven that
there is commercial benefit accruing from doing so.

32. Which of the following are legal entities that are separate from its owners, directors
and/or individuals who participate in it, i.e. separate legal entities?

I. Companies.
II. Partnerships.
III. Clubs and societies.

A. I only.
B. I and II only.
C. I, II and III only.
D. II and III only.

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33. The Memorandum of Association states which of the following?

I. The company’s authorized share capital.

II. The nature of businesses the company can engage in.
III. Names and addresses of the company’s directors.

A. I and II only.
B. I and III only.
C. II and III only.
D. II only.

34. In what aspect is a landed prime property more desirable as collateral, when
compared to publicly traded stocks?

A. Measurability.
B. Stability.
C. Liquidity.
D. Transferability.

35. A relatively new start-up company has applied for a loan. As the credit officer, you
have assessed that personal guarantees from its two company directors, who are
also the main shareholders, is required as credit support for the loan.

Which of the following types of guarantees would best protect the bank’s interest?

A. Joint and several guarantees.

B. Proportionate guarantees.
C. Limited guarantees.
D. Unlimited guarantees.

36. Which of the following loan type is least likely to be structured as revolving credit?

A. Trade finance.
B. Credit cards.
C. Overdrafts.
D. Home loans.

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37. Which of the following statements is TRUE?

I. The Securities Commission (SC) is the primary agency responsible for

regulating the Malaysian banking system.
II. Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013
(IFSA) provide the legal framework to regulate the banking system,
insurance/takaful sector, and financial markets and payments systems.
III. Malaysia has a regime of exchange control that aims to promote economic
development by ensuring residents and non-residents have sufficient access
to financial resources and the stability of foreign exchange environment.

A. I and II only.
B. I and III only.
C. I, II and III only.
D. II and III only.

38. Which of the following are disadvantages of having life insurance policies as lending
securities?

I. Life insurance policies do not cover death from suicide within the 1st year of
coverage, and thus, if the borrower does commit suicide within that timeframe,
there is no insurance payout.
II. It is time consuming to perfect a life insurance policy as security.
III. Life insurance policies will lapse unless the premiums are paid timely or there
is sufficient cash value.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

39. When dealing with a partnership, if a bank is unable to obtain consent from all the
partners in a firm, how should it proceed?

A. The bank may obtain consent from any one partner who has the mandate to
act on behalf of the business.
B. The bank must obtain consent from all of the senior partners in the business.
C. The bank must obtain consent from the majority of the partners in the
business.
D. The bank must obtain consent from any one partner in the business.

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40. Which of the following is NOT usually a feature of preference shares?

I. A fixed percentage dividend.

II. The right to vote at company meetings.
III. Priority over ordinary shareholders on asset claim in the event of company
liquidation.
IV. A higher level of risk than ordinary shares.

A. I and II only.
B. I and III only.
C. II and IV only.
D. All of the above.

41. Which of the following statements regarding lead information systems are TRUE?

I. They provide leads to assist in the process of credit decision making.

II. The data used in these systems are “live” data in that they are updated on a
real-time basis.
III. CCRIS and CTOS are examples of such systems.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

42. Which of the following is NOT a source of blacklist information?

A. A bad cheque offenders list.

B. An official list of undischarged bankrupts.
C. Police records.
D. The applicant’s income statements.

43. Which of the following statements is FALSE?

A. A cash flow statement does not show actual cash movements and thus, in
itself, is not sufficient to demonstrate loan repayment capacity or cash flow
strength.
B. A cash flow statement provides the same information as a statement of
financial position.
C. A cash flow statement summarizes the total cash generated and used by a
company during the period of one year or accounting period.
D. Business cash flow is shown by a statement of cash flow prepared by the
auditors of a limited company.

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44. A customer has indicated that he would like to purchase an insurance plan with the
primary objective of setting aside savings in the long term, while still enjoying
insurance protection.

Which of the following type of insurance is likely to be MOST suitable for this
customer?

A. Whole life insurance.

B. Term life insurance.
C. Endowment insurance.
D. MRTA.

45. When assessing an application for a retail loan such as a credit card, what source of
information should a credit officer consult in the first instance?

A. An economic report provided by the central bank.

B. A credit agency.
C. The Credit Tip Off Service.
D. The loan application form.

46. As a credit officer, you have assessed that insurance coverage is required as credit
support to protect against risk of premature death of the borrower for a 10 year term
loan.

Assuming that the borrower would like to minimize the premium cost, which policy
type would be most suitable?

A. Term life policy.

B. Whole life insurance.
C. Endowment policy.
D. Investment-linked policy.

47. If a lending bank is approached by a potential borrower who requires financing to

fund a large scale project, such as building a tourism complex, which of the following
types of reports would they be expected to provide?

A. A profitability report.
B. A viability report.
C. A productivity report.
D. A feasibility report.

48. Why might a credit report regarding a potential Malaysian borrower provided by a
fellow bank be more vague in nature than a credit report provided by a credit
reference agency?

A. The fellow bank may not want to provide commercially sensitive information to
a competitor.
B. In order to comply with banking secrecy provisions.
C. In order to comply with anti-money laundering provisions.
D. The customer may have provided the fellow bank with insufficient information.

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49. Assuming an applicant is a salaried employee, which of the following methods may
be used to verify the applicant’s income?

I. Obtaining and verifying the applicant’s income slips.

II. Checking the applicant’s recent EPF contributions.
III. Verifying against the information in the Central Credit Reference Information
System (CCRIS).

A. I and II only.
B. I and III only.
C. I, II and III only.
D. II and III only.

50. Throughout the credit process who is responsible for obtaining proper credit
documentation which shall serve to protect the loan and the bank?

A. The bank's legal department.

B. The credit officer.
C. A credit reference agency.
D. The customer is responsible for providing such documentation.

51. Which of the following statements is FALSE?

A. A bank's external solicitors may be responsible for presenting or registering

loan documents with appropriate government offices or registries.
B. The credit officer processing a loan must be the same officer who is verifying
the documents and disbursing the loan.
C. Securities documentation, particularly in respect of landed property, is
generally outsourced to external solicitors.
D. A lending bank is responsible for ensuring that signatories' identities are
verified when processing a lending agreement.

52. A fixed deposit is an example of a:

A. stable value security.

B. fluctuating value security.
C. depreciating value security.
D. high risk security.

53. Which of the following types of security may be the MOST difficult to measure in terms
of its value?

A. The surrender value of a life policy.

B. Fixed deposits.
C. Shares of an unlisted company.
D. Shares of a listed company.

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54. As a credit officer, in the event you require the borrower to pledge security, which of
the following collateral types would be MOST suitable if liquidity and measurability are
priority?

A. Publicly traded blue chip stocks.

B. A landed property.
C. A motor vehicle.
D. Plant and machinery.

55. What is the name of the document which sets out the contractual and legal
relationship between the lending bank and the borrower?

A. A pledge.
B. A loan memorandum.
C. A loan assignment.
D. A loan agreement.

56. A breach of the provisions in the loan agreement by the borrower, such as a non-
compliance with one of the terms and conditions of a loan, is known as:

A. a credit breach.
B. a credit weakness.
C. a breach of loan margin.
D. an event of default.

57. Which of the following is a form of obtaining a security?

A. Guarantee.
B. Hypothecation.
C. Power of attorney.
D. Security drawdown.

58. In addition to a Letter of Set-Off, via what other legal instrument may monies
deposited in a fixed deposit account be pledged as a security?

A. Via a letter of guarantee.

B. Via a letter of transfer.
C. Via a power of attorney.
D. Via a Memorandum of Deposit.

59. Which of the following are credit officers encouraged to avoid accepting as security
from a borrower?

A. Non-dividend paying shares.

B. Landed property.
C. Blue chip shares.
D. Cash deposits.

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60. Which of the following types of insurance policies has no cash value, but is often
used as credit support by lending banks to mitigate the risk of the borrower's
repayment capacity in the event of premature death or permanent disability?

A. A term life policy.

B. A whole life policy.
C. An endowment policy.
D. An investment-linked policy.

SECTION B : TWENTY (20) CASE-BASED MULTIPLE-CHOICE QUESTIONS

ANSWER ALL QUESTIONS IN THIS SECTION

QUESTIONS 61 – 65 ARE BASED ON THE FOLLOWING INFORMATION.

A customer of your bank wishes to invest in shares and similar instruments in order to
generate a return. He does not possess a large amount of free funds for this purpose and
approaches you to discuss the ways in which you could assist in financing his investment
activities. He raises the following questions in the course of this discussion.

61. Publicly traded shares can be acquired through various methods. Which of the
following methods may be financed by a financial institution?

I. An Initial Public Offering (IPO) exercise.

II. An Employee Share Option Scheme (ESOS).
III. A bonus issue.
IV. A private placement.

A. I, II, III and IV only.

B. I and IV only.
C. I, II and IV only.
D. I, II, and III only.

62. Which of the following is NOT a factor to be considered when assessing credit risk in
relation to providing a share financing facility to a customer?

A. The business financial performance of the shares that are to be financed.

B. The price volatility of the shares that are to be financed.
C. The dividend policy of the shares that are to be financed.
D. The borrower's proposed repayment plan.

63. The customer is interested in equity warrants and wishes to know which of the
following is TRUE?

I. Warrants would be good security for a long term loan.

II. Deep out of the money warrants are cheaper and thus better investments.
III. The risk of the underlying share has no impact on the warrant value.
IV. Warrant holders can vote at company meetings.

A. I, II, III and IV only.

B. II only.
C. II and III only.
D. None of the above.

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64. The customer applies for a share margin facility and is offered a margin financing rate
of 60%, with an approved limit of $200,000. Assuming that the customer starts the
facility with shares valued at $20,000 pledged as collateral, what is the financing limit
at the customer’s disposal if she wishes to purchase more shares?

(Note : Assume that there is no price cap on the shares that the customer would like
to purchase, and all shares purchased will be pledged as collateral.)

A. $12,000.
B. $30,000.
C. $120,000.
D. $200,000.

65. Shares financed by the bank are subject to a rights issue, the customer asks you
which of the following actions would normally require repayment of all or part of the
facility?

I. Selling the rights in the open market.

II. taking up the rights from the company.
III. Selling shares cum rights.

A. I, II and III only.

B. I and III only.
C. III only.
D. II only.

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QUESTIONS 66 – 70 ARE BASED ON THE FOLLOWING INFORMATION.

You are dealing with a customer who requires advice regarding a range of consumer loan
products which your bank offers. The customer requires a medium to long-term loan to help
her pay for some minor home renovations. In conversation, your customer explains that due
to her personal circumstances, she requires an unsecured loan.

Furthermore, the customer has recently opened a current account at your branch and would
like to apply for an arranged overdraft facility. You have also been asked to explain the
charges which may apply to the products the customer is interested in applying for.

66. You recommended an unsecured personal term loan to the customer to fund her
home renovation. The customer would like to understand how such a loan would be
different from using her credit card to pay for the renovations. Which of the following
statements is correct?

I. A term loan charges a lower interest rate on the outstanding amount as

compared to a credit card.
II. A contractor may not be able to readily accept a credit card payment if the
contractor has not signed up with a bank to accept such payments.
III. The customer has to make minimum payments every month for outstanding
amounts on the customer’s credit card but payments are not compulsory on a
monthly basis for a personal term loan.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

67. The unsecured personal term loan is offered on a flat rate add-on basis. If the loan
amount is RM60,000, the interest rate is 4% p.a. and the tenor is 36 months, how
much is the monthly installment?

A. RM1,466.67.
B. RM1,666.67.
C. RM1,866.67.
D. RM1,933.33.

68. The customer would like to better understand the features of the overdraft facility that
is tied to the current account.

Which of these are features of the facility?

I. Interest is charged on the total facility limit.

II. The facility is flexible and its usage is at the discretion of the customer.
III. The facility is available through the operation of the cheque-writing account
(i.e. the current account).

A. I and II only.
B. II and III only.
C. I and III only.
D. I, II and III only.

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69. You explain to the customer that there is a commitment fee for the overdraft facility of
1% p.a. Assuming that after applying for the overdraft facility, the customer only
draws down on 20% of the total facility limit of RM100,000, how much is the
commitment fee for one year?

A. None.
B. RM200.
C. RM800.
D. RM1,000.

70. You explain to the customer that the overdraft facility is a variable rate loan where the
interest rate is pegged to the base lending rate.

Which of the following are scenarios that may ultimately result in an increase in the
facility’s interest rate?

I. An increase in the overnight policy rate (OPR).

II. An increase in the bank’s cost of funds.
III. An increase in liquidity in the inter-bank market.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

QUESTIONS 71 – 75 ARE BASED ON THE FOLLOWING INFORMATION.

You have been contacted by a customer who is enquiring about your bank's investment
financing services. The customer is interested in investing in both unit trusts and stocks.
During an interview with the customer, he informs you that he would like to invest in
companies which form the backbone of the economy. Additionally, the customer tells you
that he would like to invest in a unit trust fund which is suitable for investors looking for
reasonably safe investments because they are well diversified across a broad spread of
asset categories including shares, fixed-income securities and cash.

71. Based on the customer's needs, what type of stocks would you advise him to invest
in?
A. Pari passu stocks.
B. Speculative stocks.
C. Preference stocks.
D. Defensive stocks.

72. Based on the customer's needs, what type of unit trusts would you advise him to
invest in?

A. A balanced fund.
B. An index fund.
C. A money market fund.
D. An aggressive growth fund.

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73. You explain to the customer that he may apply for a share margin financing facility to
fund his investments in stocks. The customer would like to better understand how
margin call works.

Which of the following is TRUE concerning margin calls?

I. A margin call happens when the loan ratio rises above the permitted margin.
II. The customer is given 5 days to reduce the loan ratio and lrectify the margin
call position.
III. The customer can reduce the margin by either depositing additional cash,
pledging additional stocks as collateral or sell a portion of the stocks in the
portfolio.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

74. The customer asks you for information relating to market indicators. Which of the
following provides an investor with some indication of the regular income that can be
expected from investing in the shares of a company?

A. The Market Index Ratio.

B. The Price to Earnings Ratio.
C. The Price to Book Ratio.
D. The Dividend Yield.

75. You are explaining measures of a share's price to the customer. Which measure of
value is regarded as the fundamental value of the shares and is based on the
company's business performance and asset base?

A. The share's intrinsic value.

B. The share's market value.
C. The share's index value.
D. The share's forecast value.

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PB3 - RETAIL LENDING MOCK 2 EXAMINATION

QUESTIONS 76 – 80 ARE BASED ON THE FOLLOWING INFORMATION.

You have been introduced to a customer who is interested in obtaining a property financing
facility. The customer informs you that he requires financing for a subdivided property.
Ideally, the customer would like to apply for a property financing product with a repayment
scheme in which the initial loan instalments start off low, and increase over time. You have
also been asked to discuss the provision of insurance for a property which has a subdivided
title as well as the fees and charges which he is likely to incur during the purchase of a
property.

76. Which of the following parties usually arranges for insurance cover for a completed
property that has a subdivided title?

A. The property’s Management Corporation.

B. The property’s developer.
C. The lending bank.
D. Local government.

77. A condominium is most likely described as which of the following?

I. Property with a virtual title.

II. Non-landed property.
III. Landed property.
IV. Property with a strata title.

A. I and II only.
B. II and IV only.
C. III and IV only.
D. I, II and IV only.

78. The property to be financed is a residential property that is under development.

Though this question is usually directed to the customer’s solicitor, the customer
wonders if you may help shed some light as to the responsibilities of the developer
after signing the Sales and Purchase Agreement.

Which of the following statements is TRUE?

I. The developer is responsible to complete the legal documentation for

transferring and registering the property under the buyer’s name (or his
beneficiaries).
II. The developer is responsible to fund and apply for the Certificate of Fitness for
Occupancy (CFO) from the local authority.
III. The developer is responsible to rectify any defect within the 18-months’ defect
liability period from the date of vacant delivery.

A. I and II only.
B. I, II and III only.
C. I and III only.
D. II and III only.

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79. The customer is concerned about the risk that the value of a financed property may
fall due to poor maintenance of the common areas of the property.

Which category of risk does this relate to?

A. Credit risk.
B. Developer risk.
C. Security risk.
D. Market risk.

80. Your customer is also interested in property financing products with a repayment
scheme in which the initial loan instalments start off low, and increase over time.

What type of repayment scheme would be suitable for your customer?

A. A fluctuating rate repayment scheme.

B. A daily rest repayment scheme.
C. A graduated repayment scheme.
D. A pre-payment repayment scheme.

- END OF QUESTION PAPER -

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PB3 - RETAIL LENDING MOCK 2 EXAMINATION

PB3 RL Mock 2 Examination Answers

1. A As the interest is already discounted up-front during loan disbursement, the

customer would only be repaying the principal amount during the loan tenor,
which is RM200,000 divided by 24 months, i.e. RM8,333.33.

2. D Financial institutions that provide bridging loans to the developers to finance a

residential housing project normally also arrange to finance the houses
purchased by the prospective buyers as an overall facility package. This is
termed 'end-purchase financing' or sometimes, simply 'end-financing'. It is also
possible for FIs who are not the bridging financier for a residential project to be
involved in 'end-financing'.

3. C Non-landed property is an individual plot of land that contains multiple

properties or dwellings such as apartments, flats, condominiums or
townhouses. Non-landed property commonly offers the added-value of
amenities and aesthetics.

4. C During the survey stage the buyer should establish the status of the
developer, its financial standing, past performance and reputation. He should
also visit the developer's office and/or site office to ascertain that it is a
genuine developer possessing a valid licence in respect of the property to be
purchased as well as an advertising permit from the Ministry of Housing and
Local Government.

5. A
Loan capital outstanding
Regular instalment = ---------------------------------
ADF

6. C Developer risk is prevalent only for property under development, and thus,
would not be a concern for the financial institution if the property financed is a
completed property. The other risks listed would still be prevalent regardless
of whether the property is completed or still under development.

7. D This type of facility is not based on a fixed monthly repayment schedule,

instead it enables the borrower (drawer) to draw funds from the facility up to
the overdraft limit granted for his or her use and to credit funds into the
account at any time, hence providing flexibility for the borrower. It is a facility
with a credit line, which is repayable on demand.

8. B The process of calculating the amount of interest to be applied to a lending

facility once a month based on the previous month's balance is known as
calculating interest on a monthly rest basis.

9. C A non-revolving term loan would be most suitable for this customer. Also,
since he has a view that interest rate is likely to rise, he would want to lock in
the current rates by obtaining a fixed rate loan. An overdraft facility would not
required since he intends to pay a fixed amount monthly.

10. D None of the scenarios would result in increased loan pricing. Instead, each of
those scenarios may result in a reduction in loan pricing.

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PB3 - RETAIL LENDING MOCK 2 EXAMINATION

11. C Bai’ bithaman ajil (deferred payment sale) and Musharakah mutanaqisah
(diminishing partnership) are Shariah principles that are typically used in home
financing.

12. C Statement II is incorrect. The maximum financing under hire purchase is 90%
of the cash price of the goods.

13. B Total term charges refer to the total amount of interest paid during the tenor of
the hiring period, i.e. Loan amount x Interest rate per annum x No. of financing
years. RM130,000 x 6% p.a. x 5 years = RM39,000.

14. C Blue chip stocks are stocks in 'blue chip companies'. Such companies are well
established and well positioned in the market. Such companies have a good
track record of management, earnings, as well as dividend payout.

15. D Speculative shares are usually issued by companies with unproven track
records and their price often represents anticipation of future growth rather
than actual earnings. Also, their share price tend to be more volatile.

16. B Hire-Purchase Act 1967 (Act Goods as per First Schedule of the Act) states
that only the following goods can be bought on hire-purchase: a) All consumer
goods (goods purchased for personal, family and household purposes) b)
Motor vehicles namely: i) Invalid carriages, ii) Motor cycles, iii) Motor cars
including taxi cabs and hire cars, iv) Goods vehicles where the maximum
permissible laden weight does not exceed 2,540 kg, and v) Buses, including
stage buses

17. A A fall in current account deposits would mean that the bank has to place more
reliance on deposits that are interest bearing for funding, thus, increasing the
bank’s cost of funds. Also, if SRR increases, the bank’s liquidity will be
reduced, thus, increasing the bank’s cost of funds.

18. C Increasing sale of wealth management products will result in increase in sales
commission, which is one form of non-interest income. Increasing loan interest
rates may have the effect of increasing interest income but would have no or
little effect on non-interest income. Reducing overdraft commitment fees will
reduce non-interest income instead of increasing it.

19. A Islamic debit cards do not provide any credit facility, consequently any debit to
the customer's account will be immediate.

20. C The dealer and its customer would have entered into an ijarah (leasing)
contract.

21. B This practice relates to the principle of protection. In order to protect its loan
exposure from default a bank may obtain security from the borrower, as well
as other means to ensure that the borrower has an alternative means to repay
any outstanding loan obligations. From the perspective of the bank security is
regarded as protection against the possibility that the customer may default on
his or her loan repayments.

22. B Market risk encompasses, interest rate risk, equity risk and foreign exchange
risk.

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PB3 - RETAIL LENDING MOCK 2 EXAMINATION

23. D Obtaining and verifying the applicant’s income tax returns is a measure to
verify the applicant’s income and hence, the applicant’s capacity to repay the
loan. It is not to ensure adequacy of collateral.

24. B A charge or mortgage is commonly used when properties are taken as

security.

25. D It is recommended that lending banks use the CAMPARI, Five C and credit
scoring models in combination as this will enhance the accuracy of the credit
decision.

26. D Financial institutions which operate within the retail lending environment are
concerned with extending loans to individuals, rather than corporate bodies,
who wish to purchase consumable goods, such as cars, white goods, landed
properties and house renovations.

27. B Credit can be defined as the measure of the ability of an individual, business
enterprise or government authority to obtain present value in the form of
money or guarantees while deferring payment to a definite future time.
Consequently credit can be described as any mode of deferred or staggered
payment.

28. C The initial stage of the credit process cycle is known as the bank's marketing
plan development.

29. A The authenticity and accuracy of all the data supplied by a customer in
support of their loan application is measured during the credit verification
phase of the credit process cycle.

30. C In order to mitigate interest rate risk banks lend at base lending rate plus a
spread. This will ensure that as interest rates on deposits rise, the cost of
funds will rise, thus ensuring a rise in the base-lending rate. Provided the
spread is fixed the bank's profits will be protected.

31. B Personal guarantees are not normally obtained when loans and credit facilities
are extended to public listed companies because public listed companies are
financially strong (in order to meet listing requirements) and shareholdings are
very diversified with a significant public holding.

32. A Clubs and societies and partnerships are unincorporated bodies and do not
have a separate legal identity.

33. A The Memorandum of Association does not contain the names and addresses
of the company’s directors. Such information is found in the Form 49.

34. B Compared to stocks, the value of landed prime property tend to be more
stable over the long term. However, they are generally less liquid (more time
needed to sell) and the transfer process is more lengthy.

35. A With joint and several guarantees, there are two or more guarantors who are
each liable for the full amount of liability owing by the company subject to the
limit of the guarantee. The lender can take legal action against all the
guarantors and end up recovering the full amount from just one or two or all of
the guarantors.

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PB3 - RETAIL LENDING MOCK 2 EXAMINATION

36. D A home loan will be provided for a fixed term secured against a property.
Unlike the alternative answers a home loan does not remain open after the
end of the term.

37. D Bank Negara Malaysia (BNM) is the primary agency responsible for regulating
the Malaysian banking system.

38. C Life insurance policies are simple to assign and takes little time to perfect as
security.

39. A As each partner is an implied agent of the partnership, the act of one will bind
all partners. Therefore, it is sufficient to deal with any partner who has
mandate to act on behalf of the partnership.

40. C Preference shares do not normally carry voting rights. Also, they are generally
lower risk than ordinary shares

41. C Lead information systems provide leads to assist the process of decision-
making, which is done via past records. These are electronic archives that
collate historical data. The information stored does not indicate the 'current
status' (such as pending, unsettled etc).

42. D Although used to verify the applicant’s income, the applicant’s income
statements is not a source of blacklist information.

43. B Business cash flow is shown by a statement of cash flow prepared by the
auditors of a limited company. The cash flow statement summarizes the total
cash generated and used by the company during the year or accounting
period. A statement of financial position shows the assets and liabilities of the
business or company.

44. C Endowment policies provide a greater element of savings than protection, and
are designed to accumulate cash value in the long term.

45. D The credit officer should consult the standard loan application form designed
to capture required data for loan processing. This is often in the case of retail
loan applications such as for credit cards, home loan and car hire purchase.

46. A As term life policy does not accumulate cash value, it is cheaper than whole
life, endowment or investment-linked policies. Also, as its namesake, it can be
purchased for a specific term, in this case, the 10 year duration of the loan.

47. D In a new start up venture or a large scale project, a feasibility report should be
available from the loan applicant. An investment in a new business always
carry significant risk and the lending bank expects the project promoters to
have conducted a business feasibility assessment before proceeding to
commit capital and loans for it.
48. B Upon receiving a request from a fellow bank, a bank may furnish a credit
report on its customer. Usually the report is very brief, general and vague in
nature, this is in order to comply with relevant banking secrecy provisions.

49. A Verifying the applicant’s salary slips and EPF contributions are measures that
may be used to confirm the applicant’s income. CCRIS only collects
information regarding the applicant’s borrowings and would not have any
income information.

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50. B Throughout the credit process it is the responsibility of the credit officer to
obtain proper credit documentation which shall serve to protect the loan and
the bank. Credit documentation includes both legal and non legal
documentation to keep full record of the borrower's communications and
agreements or undertakings to the bank.

51. B In order to maintain and protect the bank's security and interests, impartiality
and objectivity must always be observed. Thus the officer processing the loan
should not be the officer verifying the documents and disbursing the loan. This
separation of functions is part and parcel of credit risk management.

52. A Stable value security includes fixed deposits, cash margins and surrender
values of life insurance policies. These securities generally are loss free in
terms of their values.

53. C Generally, all tangible assets have value. However, this value must be
quantifiable or measurable. Less subjective elements present in the valuation
process will enhance the value certainty. Examples of situations where the
security's value may be difficult to determine objectively include but are not
limited to: debentures on a company's assets, stocks and accounts
receivable, shares of an unlisted company, works of art and guarantees.

54. A Publicly traded blue chip stocks would be the most liquid and measurable
collateral type of four available options. Blue chip stocks are liquid as they
tend to be significantly traded on the exchange and their value measurable
because the stock price is readily quoted on the exchange.

55. D A loan agreement sets out the contractual and legal relationship between the
lending bank and the borrower. It contains full details of the loan terms and
conditions and other requirements to safeguard the loan during the period.

56. D An event of default is a breach of the provisions in the loan agreement such
as a non compliance with one of the terms and conditions of the loan. This is
important as it serves as to indicate that the borrower might have some
problems that render it unable to comply.

57. B Security can be obtained through various forms, the principle forms are: via a
charge via an assignment, via a pledge via a lien, and via hypothecation.

58. D Monies deposited in a fixed deposit account be pledged as a security via a

Letter of Set-Off or a Memorandum of Deposit.
59. A Credit officers are advised to avoid the following: shares that are suspended,
shares that are volatile or highly speculative, shares that have reached the
bank's set quota, and non-dividend paying shares.

60. A A term life policy has no cash value at all. As such, it can never serve as a
security in credit. However, it can be useful as a credit support to mitigate the
risk of the borrower's repayment capacity in the event of premature death or
permanent disability.
61. C No funds are required to acquire shares in a bonus issue.

62. C Whilst the other factors have a bearing on credit risk the dividend policy of the
company whose shares are financed does not have a direct impact on credit
risk for the lender.

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63. D Warrants have a limited life and therefore are not good security for a long term
loan. Deep out of the money warrants are cheaper but they are also higher
risk, it doesn't necessarily make them a better or worse investment. Warrant
holders are not members of the company and therefore cannot vote at
company meetings. Shares with more risk will be more volatile, this will
increase a warrant's value.

64. B Outstanding loan / Share collateral = Margin of financing. Since the approved
margin financing rate is 60% and customer has existing share collateral of
$20,000, the customer would be able to draw down $30,000 on the facility
while maintaining the margin of financing at the approved rate of 60%.
Available limit / (Shares purchased + Existing share collateral) = 60%
$30,000 / ($30,000 + $20,000) = 60%

65. B I and III reduce the value of the holding and thus the value of the bank's
security. In II the customer invests more funds into the company for which
more financing may be necessary.

66. A Generally, a term loan charges a lower interest rate as compared to a

revolving credit facility such as a credit card. A merchant must first sign up
with a bank before being able to accept credit card payments. A term loan
requires payment of monthly installments.

67. C A flat rate loan on an add-on basis is where a) the interest rate is fixed and b)
the full amount of the loan is advanced to the customer and c) the monthly
repayments spread this full value plus the total interest over the loan term,
making the total monthly payments equal the loan plus interest. Thus, the
monthly repayment (of instalment plus interest) will be (RM60,000 +
$7,200)/36, which equates to RM1,866.67

68. B Interest on the facility is usually calculated daily on the amount used and for
the time it has been used, and not on the total facility limit.

69. C The commitment fee is charged on the unutilized portion of the facility. As
RM80,000 of the facility was not utilized by the customer, the 1% p.a. fee is
charged on this amount, i.e. RM800.

70. A An increase in the OPR and/or the bank’s cost of funds will increase the
bank’s base lending rate (BLR) and thus, increase the facility’s interest rate
since it is pegged to the BLR. An increase in liquidity in the inter-bank money
market means inter-bank borrowing will be cheaper, and thus, may have the
effect of reducing the bank’s cost of funds (and thus, the BLR).

71. D Defensive stocks are stocks that are operating in a business environment that
is the backbone of the economy and will not be badly affected through
economic cycles, i.e. they are relatively recession-proof. Power and utility
companies, as well as companies involved in consumer staples such as basic
foods, generally fall into this category.
72. A Balanced funds have three objectives: income, moderate capital appreciation
and capital preservation. Investment is across a broad spread of asset
categories including shares, fixed-income securities and cash. Well-diversified
and suitable for investors looking for reasonably safe investments, these are
trusts where the risks are lower but which produce average returns.

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73. C Statements I and III are true. Statement II is incorrect as the borrower is
usually given only 2 trading days to rectify a margin call position.

74. D The Dividend Yield gives the investors some indication of the regular income
that can be expected from their investment. It tends to be used by income
investors.

75. A The intrinsic value of a share is the fundamental, natural or basic value of the
share, and this is based on the company's business performance and asset
base.

76. A For properties with strata titles such as apartments or condominiums,

insurance cover is provided by the Management Corporation (MC) on the
entire building.

77. B Non-landed property occurs when an individual plot of land (freehold or

leasehold) contains multiple properties or dwellings such as apartments or a
condominium.

78. B All three statements concerning the developer’s responsibilities are true.

79. C Poor maintenance of a financed property which decreases the overall property
value is an example of security risk.

80. C A repayment scheme may be graduated in that the initial loan instalments
start off low, and gradually increase over time, usually in tandem with the
borrower's servicing capacity. This type of payment scheme will help house
buyers to reduce the burden of debt in the initial years and allow them to
allocate more money for other purposes. The increase in the borrower's
income over time will enable the financial institution to structure a higher
repayment scheme that matches the borrower's growing income level.

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