Question 1

Which of the following is not a factor that may tend to increase loan sales in the future?

Accepted Answer

A)  There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B)  Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
C)  The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
D)  The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell housing loans to decrease their amount of risky assets. 
A)  There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B)  Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
C)  The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
D)  The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell housing loans to decrease their amount of risky assets.

Question 2

A normal bond values fall with interest rate increases but the following bond often has a negative duration and therefore it is potentially attractive to banks and non-bank FIs seeking to hedge their regular bond and fixed-income portfolios.

Accepted Answer

A)  A Class 
B)  B Class 
C)  Z Class 
D)  R Class 
A)  A Class 
B)  B Class 
C)  Z Class 
D)  R Class

Question 3

When current mortgage rates fall sufficiently low that the present value savings of refinancing outweigh the cost of prepayment penalties(and other fees and costs), the mortgage holders are said to have a valuable:

Accepted Answer

A)  put option. 
B)  call option. 
C)  forward agreement. 
D)  futures contract. 
A)  put option. 
B)  call option. 
C)  forward agreement. 
D)  futures contract.

Question 4

A loan provided by a group of FIs as opposed to a single lender is called:

Accepted Answer

A)  a joint loan. 
B)  project finance. 
C)  a syndicated loan. 
D)  a multiple loan. 
A)  a joint loan. 
B)  project finance. 
C)  a syndicated loan. 
D)  a multiple loan.

Question 5

The key feature of a loan assignment is that all rights are:

Accepted Answer

A)  negotiated at the time of sale, meaning the loan buyer can opt to hold a direct claim on the borrower. 
B)  are transferred on sale, meaning the loan buyer now holds a direct claim on the borrower. 
C)  are not transferred on sale and can be sold later. 
D)  None of the listed options are correct. 
A)  negotiated at the time of sale, meaning the loan buyer can opt to hold a direct claim on the borrower. 
B)  are transferred on sale, meaning the loan buyer now holds a direct claim on the borrower. 
C)  are not transferred on sale and can be sold later. 
D)  None of the listed options are correct.

Question 6

Banks have been partially responsible for big corporate collapses such as Enron.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is true concerning loans sold without recourse?

Accepted Answer

A)  The loan sale is technically removed from the balance sheet .. 
B)  The buyer cannot put the loan back to the selling FI. 
C)  The FI has no explicit liability if the loan eventually goes bad. 
A)  The loan sale is technically removed from the balance sheet .. 
B)  The buyer cannot put the loan back to the selling FI. 
C)  The FI has no explicit liability if the loan eventually goes bad.

Question 8

Collateralised mortgage obligation (CMO) is a mortgage-backed bond issued in multiple classes or tranches.

Accepted Answer

A) True 
 B)False

Question 9

Loan participations are:

Accepted Answer

A)  riskier than loan assignments. 
B)  less risky than loan assignments. 
C)  always sold without recourse. 
D)  always sold with partial recourse. 
A)  riskier than loan assignments. 
B)  less risky than loan assignments. 
C)  always sold without recourse. 
D)  always sold with partial recourse.

Question 10

What are four reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?

Accepted Answer

First, MBBs freeze mortgages on the FI's

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The credit rating agency is:

Accepted Answer

A)  a legal party to any of the securitisation arrangements and is usually listed on all documentation. 
B)  not a legal party to any of the securitisation arrangements and is usually listed on all documentation. 
C)  a legal party to any of the securitisation arrangements but is usually not listed on all documentation. 
D)  not a legal party to any of the securitisation arrangements and is usually not listed on all documentation. 
A)  a legal party to any of the securitisation arrangements and is usually listed on all documentation. 
B)  not a legal party to any of the securitisation arrangements and is usually listed on all documentation. 
C)  a legal party to any of the securitisation arrangements but is usually not listed on all documentation. 
D)  not a legal party to any of the securitisation arrangements and is usually not listed on all documentation.

Question 13

The ___________ is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired:

Accepted Answer

A)  A Class 
B)  B Class 
C)  Z Class 
D)  R Class 
A)  A Class 
B)  B Class 
C)  Z Class 
D)  R Class

Question 14

Collateralised debt obligations:

Accepted Answer

A)  Can be created either by packaging and securitising whole mortgage loans. 
B)  by placing existing pass-throughs in a trust off the balance sheet. 
C)  can be created either by packaging and securitising unsecured loans, or by placing existing pass-throughs in a trust on-balance sheet. 
D)  can be created either by packaging and securitising whole mortgage loans and by placing existing pass-throughs in a trust off the balance sheet. 
A)  Can be created either by packaging and securitising whole mortgage loans. 
B)  by placing existing pass-throughs in a trust off the balance sheet. 
C)  can be created either by packaging and securitising unsecured loans, or by placing existing pass-throughs in a trust on-balance sheet. 
D)  can be created either by packaging and securitising whole mortgage loans and by placing existing pass-throughs in a trust off the balance sheet.

Question 15

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)  this is a regulatory requirement. 
A)  they are insiders and can be trusted. 
B)  they offer the best prices. 
C)  the ongoing relationship offers the greatest monitoring opportunities. 
D)  this is a regulatory requirement.

Question 16

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 securitisation. 
C)  Selling of a loan creates a secondary market for loans. 
D)  Ownership of the loan is always transferred to the loan purchaser. 
A)  Most loans are sold with recourse. 
B)  Loan sales are a primitive substitute for securitisation. 
C)  Selling of a loan creates a secondary market for loans. 
D)  Ownership of the loan is always transferred to the loan purchaser.

Question 17

What is NOT true of loan assignments?

Accepted Answer

A)  All rights are transferred on sale. 
B)  The loan buyer holds a direct claim on the borrower. 
C)  Ownership rights are generally much clearer in a loan sale by assignment. 
D)  Contract terms are unrestrictive from the seller's perspective. 
A)  All rights are transferred on sale. 
B)  The loan buyer holds a direct claim on the borrower. 
C)  Ownership rights are generally much clearer in a loan sale by assignment. 
D)  Contract terms are unrestrictive from the seller's perspective.

Question 18

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. 
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.

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. 
A)  geographically diversify. 
B)  decrease core deposits. 
C)  lower reserve requirements. 
D)  lower capital requirements.

Question 20

Which is of the statements below is true?

Accepted Answer

A)  An FI will earn fees when arranging a large loan, even if it sells part or all of the loan later. 
B)  Like reserve requirements, the capital adequacy requirements imposed on FIs are a burden as long as required capital exceeds the amount the FI believes to be privately beneficial. 
C)  In addition to credit risk and interest rate risk, holding loans on the balance sheet can increase the overall illiquidity of an FI's assets. 
D)  All of the listed options are correct. 
A)  An FI will earn fees when arranging a large loan, even if it sells part or all of the loan later. 
B)  Like reserve requirements, the capital adequacy requirements imposed on FIs are a burden as long as required capital exceeds the amount the FI believes to be privately beneficial. 
C)  In addition to credit risk and interest rate risk, holding loans on the balance sheet can increase the overall illiquidity of an FI's assets. 
D)  All of the listed options are correct.

Which of the following is not a factor that may tend to increase loan sales in the future?

A normal bond values fall with interest rate increases but the following bond often has a negative duration and therefore it is potentially attractive to banks and non-bank FIs seeking to hedge their regular bond and fixed-income portfolios.

When current mortgage rates fall sufficiently low that the present value savings of refinancing outweigh the cost of prepayment penalties(and other fees and costs), the mortgage holders are said to have a valuable:

A loan provided by a group of FIs as opposed to a single lender is called:

The key feature of a loan assignment is that all rights are:

Banks have been partially responsible for big corporate collapses such as Enron.

Which of the following is true concerning loans sold without recourse?

Collateralised mortgage obligation (CMO) is a mortgage-backed bond issued in multiple classes or tranches.

Loan participations are:

What are four reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?

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

The credit rating agency is:

The ___________ is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired:

Collateralised debt obligations:

Loan participations are typically sold to correspondent banks because:

Which of the following observations is not correct?

What is NOT true of loan assignments?

The move toward market value accounting:

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

Which is of the statements below is true?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 8: Credit Risk I: Individual Loan Risk

Which of the following is not a factor that may tend to increase loan sales in the future?

A normal bond values fall with interest rate increases but the following bond often has a negative duration and therefore it is potentially attractive to banks and non-bank FIs seeking to hedge their regular bond and fixed-income portfolios.

When current mortgage rates fall sufficiently low that the present value savings of refinancing outweigh the cost of prepayment penalties(and other fees and costs), the mortgage holders are said to have a valuable:

A loan provided by a group of FIs as opposed to a single lender is called:

The key feature of a loan assignment is that all rights are:

Banks have been partially responsible for big corporate collapses such as Enron.

Which of the following is true concerning loans sold without recourse?

Collateralised mortgage obligation (CMO) is a mortgage-backed bond issued in multiple classes or tranches.

Loan participations are:

What are four reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?

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

The credit rating agency is:

The ___________ is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired:

Collateralised debt obligations:

Loan participations are typically sold to correspondent banks because:

Which of the following observations is not correct?

What is NOT true of loan assignments?

The move toward market value accounting:

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

Which is of the statements below is true?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters