Question 1

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 2

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 3

Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?

Accepted Answer

A) Federal Debt Collection Improvements Act. 
B) Financial Services Modernization Act. 
C) The Bank Holding Company Act. 
D) Depository Institutions Deregulation and Monetary Control Act. 
A) Federal Debt Collection Improvements Act. 
B) Financial Services Modernization Act. 
C) The Bank Holding Company Act. 
D) Depository Institutions Deregulation and Monetary Control Act.

Question 4

Highly leveraged transaction (HLT)loans typically are used to finance new fixed assets of an ongoing firm.

Accepted Answer

A) True 
 B)False

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

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 exposure to the original borrower defaulting and risk exposure to the failure of the selling bank. 
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 exposure to the original borrower defaulting and risk exposure to the failure of the selling bank.

Question 7

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

Question 8

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 9

Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.

Accepted Answer

A) True 
 B)False

Question 10

Loan sales do not create a new type of security as with other methods to manage credit risk.

Accepted Answer

A) True 
 B)False

Question 11

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 the SEC requires shelf registration of new issues. 
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 the SEC requires shelf registration of new issues.

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

Banks began selling short-term loans only since the passage of the Financial Services Modernization Act in 1999.

Accepted Answer

A) True 
 B)False

Question 15

The traditional interbank loan sale market has been growing rapidly due to an increase in the number of mergers and acquisitions.

Accepted Answer

A) True 
 B)False

Question 16

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

Question 17

$\text { Gud Bank: }$

$\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.
If the proceeds of the loan sale are used to pay off purchased funds,what will be the balance of the purchased funds for Good Bank after the transaction?

Accepted Answer

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

Question 18

As of 2010,the Department of Housing and Urban Development (HUD)no longer sells loans that were used to purchase multifamily apartment properties.

Accepted Answer

A) True 
 B)False

Question 19

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 20

The sellers of domestic loans and HLT loans include all of the following EXCEPT

Accepted Answer

A) major money center banks. 
B) foreign banks. 
C) U.S.government and its agencies. 
D) non-financial companies. 
A) major money center banks. 
B) foreign banks. 
C) U.S.government and its agencies. 
D) non-financial companies.

Exam 25: Loan Sales

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

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.

Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?

Highly leveraged transaction (HLT)loans typically are used to finance new fixed assets of an ongoing firm.

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

A buyer of a loan participation is exposed to

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

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

Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.

Loan sales do not create a new type of security as with other methods to manage credit risk.

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

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

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

Banks began selling short-term loans only since the passage of the Financial Services Modernization Act in 1999.

The traditional interbank loan sale market has been growing rapidly due to an increase in the number of mergers and acquisitions.

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

As of 2010,the Department of Housing and Urban Development (HUD)no longer sells loans that were used to purchase multifamily apartment properties.

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

The sellers of domestic loans and HLT loans include all of the following EXCEPT

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