While the Risks of Construction Lending May Be Less in a Number

question 3

Multiple Choice

While the risks of construction lending may be less in a number of respects than those associated with land acquisition, banks still require a premium in their lending rate as compensation for the risks involved. For construction loans, banks typically require a premium above LIBOR that ranges from:

• A) 0-50 basis points
• B) 50-150 basis points
• C) 150-250 basis points
• D) 250-350 basis points

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Definitions:

Operating Cycle

The average period of time between the acquisition of inventory by a business and the receipt of cash from sales of the inventory, encompassing both the purchase of inventory and the collection of receivables.

Interest Expense

The cost incurred by an entity for borrowed funds.

Current Liabilities

Obligations or debts that a company must pay within one year or within its normal operating cycle if longer.

Interest-Bearing Notes

Debt securities that pay interest to the holder at a fixed or variable rate until maturity.