Question 1

Insurance companies and pension funds are important buyers of long-maturity loans.

Accepted Answer

A) True 
 B)False

Question 2

What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?

Accepted Answer

A) Participations and assignments. 
B) Participations and originations. 
C) Syndications and originations. 
D) Transfers and assignments. 
E) Exercise and transfers. 
A) Participations and assignments. 
B) Participations and originations. 
C) Syndications and originations. 
D) Transfers and assignments. 
E) Exercise and transfers.

Question 3

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by OSFI.

Accepted Answer

A) True 
 B)False

Question 4

Historically, correspondent banking relationships have been important in the sale of bank loans.

Accepted Answer

A) True 
 B)False

Question 5

Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT a reason for using a bad bank as a vehicle to add value in the loan sale process?

Accepted Answer

A) Contracts for managers can be created to maximize the incentives to generate enhanced values from loan sales. 
B) The bad bank enables bad assets to be managed by loan workout specialists. 
C) The bad bank does not need to be concerned about liquidity needs since it does not have any deposits. 
D) Moving the bad loans off the balance sheet of the good bank will improve the markets perception, and thus performance, of the good bank. 
E) The good bank-bad bank structure increases information asymmetries regarding the value of the good bank's assets. 
A) Contracts for managers can be created to maximize the incentives to generate enhanced values from loan sales. 
B) The bad bank enables bad assets to be managed by loan workout specialists. 
C) The bad bank does not need to be concerned about liquidity needs since it does not have any deposits. 
D) Moving the bad loans off the balance sheet of the good bank will improve the markets perception, and thus performance, of the good bank. 
E) The good bank-bad bank structure increases information asymmetries regarding the value of the good bank's assets.

Question 7

Loans originated by domestic Canadian banks cannot be sold to foreign banks.

Accepted Answer

A) True 
 B)False

Question 8

Loan participations are typically sold to correspondent banks because

Accepted Answer

A) they are insiders and can be trusted. 
B) they offer the best prices. 
C) the ongoing relationship offers the greatest monitoring opportunities. 
D) it is a regulatory requirement. 
E) correspondent banks are captive customers. 
A) they are insiders and can be trusted. 
B) they offer the best prices. 
C) the ongoing relationship offers the greatest monitoring opportunities. 
D) it is a regulatory requirement. 
E) correspondent banks are captive customers.

Question 9

A type of company that recently has moved from only purchasing loans on the secondary market into primary loan syndication is

Accepted Answer

A) a bank loan mutual fund. 
B) a domestic bank. 
C) a foreign bank. 
D) an investment bank. 
E) a vulture fund. 
A) a bank loan mutual fund. 
B) a domestic bank. 
C) a foreign bank. 
D) an investment bank. 
E) a vulture fund.

Question 10

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

Accepted Answer

A) True 
 B)False

Question 11

The primary sellers of domestic loans are medium-sized credit unions.

Accepted Answer

A) True 
 B)False

Question 12

Loan assignments

Accepted Answer

A) are common in loan syndications. 
B) do not have buyer restrictions. 
C) comprise less than 30 percent of the Canadian and U.S. loan sales market. 
D) involve extremely high monitoring costs. 
E) expose the buyer to a double risk and involve double monitoring costs. 
A) are common in loan syndications. 
B) do not have buyer restrictions. 
C) comprise less than 30 percent of the Canadian and U.S. loan sales market. 
D) involve extremely high monitoring costs. 
E) expose the buyer to a double risk and involve double monitoring costs.

Question 13

As FIs consolidate and expand their range of financial services, customer relationships with commercial entities are likely to become more important.

Accepted Answer

A) True 
 B)False

Question 14

Identify the correct observation.

Accepted Answer

A) Most loan sales are completed in less than 30 days. 
B) Up to 50 percent of loan sales eventually fail to be completed at all. 
C) There is no incentive to renege on a loan sales contract. 
D) The tendency to renege on a loan sales contract decrease as market prices move away from those originally agreed. 
E) Contractual problems, trading frictions, and costs rarely affect loan sales. 
A) Most loan sales are completed in less than 30 days. 
B) Up to 50 percent of loan sales eventually fail to be completed at all. 
C) There is no incentive to renege on a loan sales contract. 
D) The tendency to renege on a loan sales contract decrease as market prices move away from those originally agreed. 
E) Contractual problems, trading frictions, and costs rarely affect loan sales.

Question 15

Good Bank:   Bad Bank:   Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds. What will be the total assets of Good Bank after the sale of the loans?

Accepted Answer

A) $1,200. 
B) $232. 
C) $132. 
D) $68. 
E) $0. 
A) $1,200. 
B) $232. 
C) $132. 
D) $68. 
E) $0.

Question 16

Loan sales do not completely protect the lending FI from credit risk exposure because

Accepted Answer

A) defaults may reduce the ability of the lending bank to sell loans in the future. 
B) a loan sale contains an implicit quality guarantee by the lending FI. 
C) loans are always sold with recourse. 
D) regulators require the lending FI to make restitution for defaulted loans. 
E) loan sales force the FI to mark its remaining loans to market prices. 
A) defaults may reduce the ability of the lending bank to sell loans in the future. 
B) a loan sale contains an implicit quality guarantee by the lending FI. 
C) loans are always sold with recourse. 
D) regulators require the lending FI to make restitution for defaulted loans. 
E) loan sales force the FI to mark its remaining loans to market prices.

Question 17

Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.

Accepted Answer

A) True 
 B)False

Question 18

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated from the FIs balance sheet.

Accepted Answer

A) True 
 B)False

Question 19

Besides reducing credit risks, an FI has an incentive to sell loans it originates for all of the following reasons EXCEPT to:

Accepted Answer

A) geographically diversify. 
B) decrease core deposits. 
C) lower reserve requirements. 
D) lower capital requirements. 
E) generate reinvestment income. 
A) geographically diversify. 
B) decrease core deposits. 
C) lower reserve requirements. 
D) lower capital requirements. 
E) generate reinvestment income.

Question 20

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

Accepted Answer

A) Window. 
B) Financial distress. 
C) Foreclosure. 
D) Recession. 
E) Assignment. 
A) Window. 
B) Financial distress. 
C) Foreclosure. 
D) Recession. 
E) Assignment.

Exam 25: Loan Sales

Insurance companies and pension funds are important buyers of long-maturity loans.

What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by OSFI.

Historically, correspondent banking relationships have been important in the sale of bank loans.

Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.

Which of the following is NOT a reason for using a bad bank as a vehicle to add value in the loan sale process?

Loans originated by domestic Canadian banks cannot be sold to foreign banks.

Loan participations are typically sold to correspondent banks because

A type of company that recently has moved from only purchasing loans on the secondary market into primary loan syndication is

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

The primary sellers of domestic loans are medium-sized credit unions.

Loan assignments

As FIs consolidate and expand their range of financial services, customer relationships with commercial entities are likely to become more important.

Identify the correct observation.

Good Bank: Bad Bank: Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds. What will be the total assets of Good Bank after the sale of the loans?

Loan sales do not completely protect the lending FI from credit risk exposure because

Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated from the FIs balance sheet.

Besides reducing credit risks, an FI has an incentive to sell loans it originates for all of the following reasons EXCEPT to:

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Securitization Index

Filters