Question 1

Loan sales by foreign banks

Accepted Answer

A) are forbidden in the U.S.domestic market. 
B) must be of a certain size to be purchased by a domestic FI. 
C) are allowed to be purchased by domestic FIs if the loan is to a highly-rated company. 
D) must be of a certain duration,and be sold without recourse in order to be purchased by a domestic FI. 
A) are forbidden in the U.S.domestic market. 
B) must be of a certain size to be purchased by a domestic FI. 
C) are allowed to be purchased by domestic FIs if the loan is to a highly-rated company. 
D) must be of a certain duration,and be sold without recourse in order to be purchased by a domestic FI.

Question 2

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 3

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

Question 4

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

Question 5

The buyer of a loan participation bears double monitoring costs.

Accepted Answer

A) True 
 B)False

Question 6

FIs discourage borrowers from hedging their own risk of default.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is NOT a reason for FIs to sell loans?

Accepted Answer

A) Loan diversification. 
B) To reduce required reserves. 
C) To reduce required capital. 
D) To reduce costs of credit risk assessment. 
A) Loan diversification. 
B) To reduce required reserves. 
C) To reduce required capital. 
D) To reduce costs of credit risk assessment.

Question 8

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 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 because of higher required capital levels.

Question 9

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 10

Most HLT loans are very heterogeneous with respect to the size of the issue,the interest payment date,interest indexing,and prepayment features.

Accepted Answer

A) True 
 B)False

Question 11

The Resolution Trust Corporation (RTC),a government agency formed to manage failed S&Ls in the early 1990s,followed a Good Bank/Bad Bank concept in the sale of loans.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is a reason for an FI to sell a residential real estate loan rather than securitize it through GNMA?

Accepted Answer

A) The loan is too large to meet securitization standards. 
B) The loan is not insured by FHA or guaranteed by the VA. 
C) The loan recipient's income cannot be verified. 
D) The loan carries a non-standard adjustable interest rate. 
E) All of the options. 
A) The loan is too large to meet securitization standards. 
B) The loan is not insured by FHA or guaranteed by the VA. 
C) The loan recipient's income cannot be verified. 
D) The loan carries a non-standard adjustable interest rate. 
E) All of the options.

Question 13

Banks and other FIs sell loans because of all of the following EXCEPT

Accepted Answer

A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution.

Question 14

Which of the following is NOT true of a loan that is sold without recourse?

Accepted Answer

A) The loan is removed from the FI's balance sheet. 
B) The FI has no explicit liability if the loan eventually goes bad. 
C) The FI that originated the loan bears all the credit risk. 
D) The buyer can put the loan back to the selling FI. 
A) The loan is removed from the FI's balance sheet. 
B) The FI has no explicit liability if the loan eventually goes bad. 
C) The FI that originated the loan bears all the credit risk. 
D) The buyer can put the loan back to the selling FI.

Question 15

A type of company that specializes in distressed loans 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 16

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest.

Accepted Answer

A) True 
 B)False

Question 19

Investment banks are the predominant buyers of HLT loans because they are more informed agents in this market than other investors.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 25: Loan Sales

Loan sales by foreign banks

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

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

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

The buyer of a loan participation bears double monitoring costs.

FIs discourage borrowers from hedging their own risk of default.

Which of the following is NOT a reason for FIs to sell loans?

The implementation of BIS capital requirements may be expected to

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

Most HLT loans are very heterogeneous with respect to the size of the issue,the interest payment date,interest indexing,and prepayment features.

The Resolution Trust Corporation (RTC),a government agency formed to manage failed S&Ls in the early 1990s,followed a Good Bank/Bad Bank concept in the sale of loans.

Which of the following is a reason for an FI to sell a residential real estate loan rather than securitize it through GNMA?

Banks and other FIs sell loans because of all of the following EXCEPT

Which of the following is NOT true of a loan that is sold without recourse?

A type of company that specializes in distressed loans is

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

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

Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest.

Investment banks are the predominant buyers of HLT loans because they are more informed agents in this market than other investors.

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

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