Question 1

One way to boost the capital to assets ratio of an FI is through loan sales.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following 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) Transfer of U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) Ownership rights are generally much clearer in a loan sale by assignment. 
E) 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) Transfer of U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) Ownership rights are generally much clearer in a loan sale by assignment. 
E) Contract terms are unrestrictive from the seller's perspective. E

Question 4

In the sale of a loan to an investor/buyer,there are fewer agency costs associated with loan participation contracts than with loan assignment contracts.

Accepted Answer

A) True 
 B)False

Question 5

When an FI sells the loan of an individual corporation in the secondary market,the corporation's stock often decreases in value.

Accepted Answer

A) True 
 B)False

Question 6

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. 
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.

Question 7

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. 
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.

Question 8

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

Accepted Answer

A) domestic banks. 
B) foreign banks. 
C) the Resolution Trust Corporation. 
D) non-financial companies. 
A) domestic banks. 
B) foreign banks. 
C) the Resolution Trust Corporation. 
D) non-financial companies.

Question 9

$\text { Gud Bank: }$

$\begin{array}{l}
\begin{array}{lll}
\text { Cash } & & \$ 200 \ 
\text { Goodloans } & & \$ 1,000 \ 
\text { Bad Loans } & & \$ 380 \ 
\text { Total } & & \$ 1,580 \ 
&\text { Bad Bank: } & \ 
\text { Cash } & &  \$ 240\
\text {  Loans } & & 0 \ 
\
\text { Total} & & \$ 240 \

\end{array}
\begin{array}{lll}
\text { Deposits} &\$ 1,000 \ 
\text { Puychased funds} &\$ 300 \ 
\text { Equity} &\$ 280 \ 
& \$ 1,580 \
\
\text { Bonds} &  \$ 120\ 
\text { Preferred stock} &\$ 40 \ 
\text { Common stock} &\$ 80 \ 
& \$ 240 
\end{array}
\end{array}$

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

Question 10

The primary sellers of domestic loans are medium-sized regional banks.

Accepted Answer

A) True 
 B)False

Question 11

Loan assignments

Accepted Answer

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

Question 12

Loan sales by an FI are another tool to manage credit risk of the FI.

Accepted Answer

A) True 
 B)False

Question 13

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. 
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.

Question 14

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

Question 15

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. 
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.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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. 
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.

Question 18

Although a loan sale strategy for an FI may reduce or eliminate credit risk,the strategy does not affect the FI's liquidity risk.

Accepted Answer

A) True 
 B)False

Question 19

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

Question 20

$\text { Gud Bank: }$

$\begin{array}{l}
\begin{array}{lll}
\text { Cash } & & \$ 200 \ 
\text { Goodloans } & & \$ 1,000 \ 
\text { Bad Loans } & & \$ 380 \ 
\text { Total } & & \$ 1,580 \ 
&\text { Bad Bank: } & \ 
\text { Cash } & &  \$ 240\
\text {  Loans } & & 0 \ 
\
\text { Total} & & \$ 240 \

\end{array}
\begin{array}{lll}
\text { Deposits} &\$ 1,000 \ 
\text { Puychased funds} &\$ 300 \ 
\text { Equity} &\$ 280 \ 
& \$ 1,580 \
\
\text { Bonds} &  \$ 120\ 
\text { Preferred stock} &\$ 40 \ 
\text { Common stock} &\$ 80 \ 
& \$ 240 
\end{array}
\end{array}$

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 amount of equity on the balance sheet of Good Bank after the sale of the loans?

Accepted Answer

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

Exam 25: Loan Sales

One way to boost the capital to assets ratio of an FI is through loan sales.

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

Which of the following is NOT true of loan assignments?

In the sale of a loan to an investor/buyer,there are fewer agency costs associated with loan participation contracts than with loan assignment contracts.

When an FI sells the loan of an individual corporation in the secondary market,the corporation's stock often decreases in value.

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

Loan participations are typically sold to correspondent banks because

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

The primary sellers of domestic loans are medium-sized regional banks.

Loan assignments

Loan sales by an FI are another tool to manage credit risk of the FI.

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

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

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

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

Identify the correct observation.

Although a loan sale strategy for an FI may reduce or eliminate credit risk,the strategy does not affect the FI's liquidity risk.

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?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

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

Filters