Question 1

In a loan participation

Accepted Answer

A) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
B) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
C) the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
D) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale, and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
E) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale, and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
A) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
B) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
C) the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
D) the holder (buyer) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale, and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
E) the holder (buyer) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale, and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan.

Question 2

Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.

Accepted Answer

A) True 
 B)False

Question 3

Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest.

Accepted Answer

A) True 
 B)False

Question 4

Why do spreads on HLT loans behave more like investment-grade bonds than like high- yield bonds?

Accepted Answer

A) They tend to be more junior in bankruptcy. 
B) They tend to have greater collateral backing than do high-yield bonds. 
C) Because no bank makes a market in this debt. 
D) Because securities firms do not make a market in this debt. 
E) They tend to have no covenant protection. 
A) They tend to be more junior in bankruptcy. 
B) They tend to have greater collateral backing than do high-yield bonds. 
C) Because no bank makes a market in this debt. 
D) Because securities firms do not make a market in this debt. 
E) They tend to have no covenant protection.

Question 5

The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.

Accepted Answer

A) True 
 B)False

Question 6

When an FI sells a loan with recourse, a liability is created on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 7

A buyer of a loan participation is exposed to

Accepted Answer

A) risk exposure to the original borrower defaulting. 
B) risk exposure to the failure of the selling bank. 
C) moral hazard problems because the borrower is no longer monitored by the seller. 
D) risk of exposure to the original borrower defaulting and risk exposure to the failure of the selling bank. 
E) Risk exposure to the original borrower defaulting, and moral hazard problems because the borrower is no longer monitored by the seller. 
A) risk exposure to the original borrower defaulting. 
B) risk exposure to the failure of the selling bank. 
C) moral hazard problems because the borrower is no longer monitored by the seller. 
D) risk of exposure to the original borrower defaulting and risk exposure to the failure of the selling bank. 
E) Risk exposure to the original borrower defaulting, and moral hazard problems because the borrower is no longer monitored by the seller.

Question 8

Banks that sell many of their loans

Accepted Answer

A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
E) relinquish some of their roles as financial intermediaries. 
A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
E) relinquish some of their roles as financial intermediaries.

Question 9

Which of the following observations is NOT correct?

Accepted Answer

A) Most loans are sold with recourse. 
B) Loan sales are a primitive substitute for securitization. 
C) Selling of a loan creates a secondary market for loans. 
D) Ownership of the loan is always transferred to the loan purchaser. 
E) Loan sales do not involve the creation of new types of securities. 
A) Most loans are sold with recourse. 
B) Loan sales are a primitive substitute for securitization. 
C) Selling of a loan creates a secondary market for loans. 
D) Ownership of the loan is always transferred to the loan purchaser. 
E) Loan sales do not involve the creation of new types of securities.

Question 10

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

Accepted Answer

A) True 
 B)False

Question 11

Loan participations

Accepted Answer

A) are riskier than loan assignments. 
B) are less risky than loan assignments. 
C) are always sold without recourse. 
D) are always sold with partial recourse. 
E) are made in smaller denominations than are loan assignments. 
A) are riskier than loan assignments. 
B) are less risky than loan assignments. 
C) are always sold without recourse. 
D) are always sold with partial recourse. 
E) are made in smaller denominations than are loan assignments.

Question 12

Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.

Accepted Answer

A) True 
 B)False

Question 13

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

Accepted Answer

A) True 
 B)False

Question 14

The major buyers of Canadian and U.S. domestic loans of non-distressed companies include all of the following EXCEPT

Accepted Answer

A) domestic banks. 
B) foreign banks. 
C) the Canada Mortgage and Housing Corporation. 
D) non-financial companies. 
E) closed-end bank loan mutual funds. 
A) domestic banks. 
B) foreign banks. 
C) the Canada Mortgage and Housing Corporation. 
D) non-financial companies. 
E) closed-end bank loan mutual funds.

Question 15

The move toward market value accounting

Accepted Answer

A) increases banks' incentives to sell loans to avoid reporting capital losses. 
B) decreases banks' incentives to sell loans to avoid reporting capital losses. 
C) increases banks' incentives to sell loans since all assets will automatically be marked to market. 
D) decreases banks' incentives to sell loans since all assets will automatically be marked to market. 
E) has no impact on the banks' incentives to sell loans. 
A) increases banks' incentives to sell loans to avoid reporting capital losses. 
B) decreases banks' incentives to sell loans to avoid reporting capital losses. 
C) increases banks' incentives to sell loans since all assets will automatically be marked to market. 
D) decreases banks' incentives to sell loans since all assets will automatically be marked to market. 
E) has no impact on the banks' incentives to sell loans.

Question 16

Banks and other FIs sell loans because of all of the following EXCEPT

Accepted Answer

A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
E) increase in fee income through brokerage functions. 
A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
E) increase in fee income through brokerage functions.

Question 17

Which of the following transactions meets the legal definition of a highly leveraged transaction (HLT)?

Accepted Answer

A) A buyout that increases debt from $100 million to $150 million resulting in a 25 percent leverage ratio. 
B) An investment project that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio. 
C) An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio. 
D) An acquisition that increases debt from $100 million to $150 million resulting in a 70 percent leverage ratio. 
E) An investment project that results in an 80 percent leverage ratio. 
A) A buyout that increases debt from $100 million to $150 million resulting in a 25 percent leverage ratio. 
B) An investment project that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio. 
C) An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio. 
D) An acquisition that increases debt from $100 million to $150 million resulting in a 70 percent leverage ratio. 
E) An investment project that results in an 80 percent leverage ratio.

Question 18

The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.

Accepted Answer

A) True 
 B)False

Question 19

An FI that sells a loan with recourse retains ownership of the loan.

Accepted Answer

A) True 
 B)False

Question 20

HLT loans typically have all of the following characteristics except which of the following?

Accepted Answer

A) They have a short maturity of less than three months. 
B) They are secured by assets of the borrowing firm. 
C) They have floating rates tied to LIBOR or some other short-term index. 
D) They have strong covenant protection. 
E) They are term loans. 
A) They have a short maturity of less than three months. 
B) They are secured by assets of the borrowing firm. 
C) They have floating rates tied to LIBOR or some other short-term index. 
D) They have strong covenant protection. 
E) They are term loans.

Exam 25: Loan Sales

In a loan participation

Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.

Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest.

Why do spreads on HLT loans behave more like investment-grade bonds than like high- yield bonds?

The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.

When an FI sells a loan with recourse, a liability is created on the balance sheet.

A buyer of a loan participation is exposed to

Banks that sell many of their loans

Which of the following observations is NOT correct?

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

Loan participations

Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

The major buyers of Canadian and U.S. domestic loans of non-distressed companies include all of the following EXCEPT

The move toward market value accounting

Banks and other FIs sell loans because of all of the following EXCEPT

Which of the following transactions meets the legal definition of a highly leveraged transaction (HLT)?

The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.

An FI that sells a loan with recourse retains ownership of the loan.

HLT loans typically have all of the following characteristics except which of the following?

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