Question 1

The principal objective in the creation of _____ is to maximize asset values by separating good loans from bad loans.

Accepted Answer

A) hedge funds 
B) bad banks 
C) vulture funds 
D) structured banks 
E) correspondent banks 
A) hedge funds 
B) bad banks 
C) vulture funds 
D) structured banks 
E) correspondent banks

Question 2

Because a bad-bank bank has a difficult time gaining deposits for funding, it also has a difficult time devising an optimal strategy to manage and dispose of bad assets.

Accepted Answer

A) True 
 B)False

Question 3

Highly leveraged transaction (HLT) loans are typically unsecured, short term and have fixed rates.

Accepted Answer

A) True 
 B)False

Question 4

The growth of the commercial paper market has hurt the market for loan sales by

Accepted Answer

A) offering some borrowers alternatives to bank loans. 
B) underpricing the banks that sell loans. 
C) fostering the credit crunch. 
D) adding another regulatory layer since OSFI requires shelf registration of new issues. 
E) increasing moral hazard concerns in the market. 
A) offering some borrowers alternatives to bank loans. 
B) underpricing the banks that sell loans. 
C) fostering the credit crunch. 
D) adding another regulatory layer since OSFI requires shelf registration of new issues. 
E) increasing moral hazard concerns in the market.

Question 5

Vulture funds are

Accepted Answer

A) management consulting firms that employ turn-around specialists. 
B) portfolios consisting of stakes in distressed companies. 
C) mutual funds that grow by acquiring their competitors. 
D) mutual funds that invest only in highly-leveraged transactions. 
E) companies offering burial insurance contracts. 
A) management consulting firms that employ turn-around specialists. 
B) portfolios consisting of stakes in distressed companies. 
C) mutual funds that grow by acquiring their competitors. 
D) mutual funds that invest only in highly-leveraged transactions. 
E) companies offering burial insurance contracts.

Question 6

Which observation is true of vulture funds?

Accepted Answer

A) Their decisions based on developing and maintaining long-term relationships. 
B) Their sole agenda is to helping the distressed firm to survive. 
C) Their investments are always passive. 
D) They are relationship based, not transaction driven. 
E) In a restructuring, they are looking for a return on capital invested. 
A) Their decisions based on developing and maintaining long-term relationships. 
B) Their sole agenda is to helping the distressed firm to survive. 
C) Their investments are always passive. 
D) They are relationship based, not transaction driven. 
E) In a restructuring, they are looking for a return on capital invested.

Question 7

The definition of a highly leveraged transaction is any transaction that involves a buyout, acquisition or recapitalization.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?

Accepted Answer

A) Bank loan mutual funds. 
B) Credit unions. 
C) Foreign banks. 
D) Investment banks. 
E) Vulture funds. 
A) Bank loan mutual funds. 
B) Credit unions. 
C) Foreign banks. 
D) Investment banks. 
E) Vulture funds.

Question 9

Most vulture funds are formed by the mutual fund industry as a way around restrictions from participating in the FI-originated loan sales market.

Accepted Answer

A) True 
 B)False

Question 10

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

Accepted Answer

A) Participations. 
B) Originations. 
C) Syndications. 
D) Assignments. 
E) Transfers. 
A) Participations. 
B) Originations. 
C) Syndications. 
D) Assignments. 
E) Transfers.

Question 11

Which of the following is NOT a key characteristic of loans sold in the short-term loan sale market?

Accepted Answer

A) Issued as a secured loan. 
B) Loans to investment grade borrowers or better. 
C) Issued with a fixed rate. 
D) Sold in units of $1 million and up. 
E) Issued for 90 days or less. 
A) Issued as a secured loan. 
B) Loans to investment grade borrowers or better. 
C) Issued with a fixed rate. 
D) Sold in units of $1 million and up. 
E) Issued for 90 days or less.

Question 12

A loan credit rating is the same as bond credit rating in that it is based solely on the financial soundness of the underlying corporation.

Accepted Answer

A) True 
 B)False

Question 13

A loan made to finance a merger and acquisition that usually results in a high leverage ratio for the borrower is a

Accepted Answer

A) loan sold without recourse. 
B) highly leveraged transaction loan. 
C) loan sold with recourse. 
D) loan assignment transaction. 
E) loan participation transaction. 
A) loan sold without recourse. 
B) highly leveraged transaction loan. 
C) loan sold with recourse. 
D) loan assignment transaction. 
E) loan participation transaction.

Question 14

Loan assignments make up more than 90 percent of the Canadian and U.S. loan sale market because

Accepted Answer

A) they have lower capital requirements than other types of loan sales. 
B) they are riskier than are other types of loan sales. 
C) monitoring costs are reduced since all rights are transferred upon sale. 
D) regulators prefer these transactions to loan participations. 
E) there is no secondary market in loan participations. 
A) they have lower capital requirements than other types of loan sales. 
B) they are riskier than are other types of loan sales. 
C) monitoring costs are reduced since all rights are transferred upon sale. 
D) regulators prefer these transactions to loan participations. 
E) there is no secondary market in loan participations.

Question 15

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

Accepted Answer

A) True 
 B)False

Question 16

The buyer of a loan participation benefits because the only risk exposure is to the borrower.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is NOT a reason for a FI to sell loans with recourse?

Accepted Answer

A) To reduce capital requirements. 
B) To avoid credit risk exposure. 
C) To control interest rate risk exposure. 
D) To avoid regulatory scrutiny. 
E) To make it possible to lend large amounts to an individual borrower. 
A) To reduce capital requirements. 
B) To avoid credit risk exposure. 
C) To control interest rate risk exposure. 
D) To avoid regulatory scrutiny. 
E) To make it possible to lend large amounts to an individual borrower.

Question 18

A type of FI that predominantly buys HLT loans because these loans require the kinds of investment analysis skills used in other parts of the FI's business 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 19

Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

Accepted Answer

A) True 
 B)False

Question 20

The implementation of BIS capital requirements may be expected to

Accepted Answer

A) increase the downward trend in loan sales because of higher required capital levels. 
B) increase the downward trend in loan sales because of the use of risk adjusted assets. 
C) decrease the downward trend in loan sales because of the use of risk adjusted assets. 
D) decrease the downward trend in loan sales because of higher required capital levels. 
E) decrease the downward trend in loan sales because of the use of risk adjusted assets, and decrease the downward trend in loan sales because of higher required capital levels. 
A) increase the downward trend in loan sales because of higher required capital levels. 
B) increase the downward trend in loan sales because of the use of risk adjusted assets. 
C) decrease the downward trend in loan sales because of the use of risk adjusted assets. 
D) decrease the downward trend in loan sales because of higher required capital levels. 
E) decrease the downward trend in loan sales because of the use of risk adjusted assets, and decrease the downward trend in loan sales because of higher required capital levels.

Exam 25: Loan Sales

The principal objective in the creation of _____ is to maximize asset values by separating good loans from bad loans.

Because a bad-bank bank has a difficult time gaining deposits for funding, it also has a difficult time devising an optimal strategy to manage and dispose of bad assets.

Highly leveraged transaction (HLT) loans are typically unsecured, short term and have fixed rates.

The growth of the commercial paper market has hurt the market for loan sales by

Vulture funds are

Which observation is true of vulture funds?

The definition of a highly leveraged transaction is any transaction that involves a buyout, acquisition or recapitalization.

Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?

Most vulture funds are formed by the mutual fund industry as a way around restrictions from participating in the FI-originated loan sales market.

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

Which of the following is NOT a key characteristic of loans sold in the short-term loan sale market?

A loan credit rating is the same as bond credit rating in that it is based solely on the financial soundness of the underlying corporation.

A loan made to finance a merger and acquisition that usually results in a high leverage ratio for the borrower is a

Loan assignments make up more than 90 percent of the Canadian and U.S. loan sale market because

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

The buyer of a loan participation benefits because the only risk exposure is to the borrower.

Which of the following is NOT a reason for a FI to sell loans with recourse?

A type of FI that predominantly buys HLT loans because these loans require the kinds of investment analysis skills used in other parts of the FI's business is

Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

The implementation of BIS capital requirements may be expected to

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