Question 1

Which of the following transactions meets the legal definition of a highly leveraged transaction (HLT)?

Accepted Answer

A) A buyout that increases debt from $100 million to $150 million resulting in a 25 percent leverage ratio. 
B) An investment project that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio. 
C) An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio. 
D) An acquisition that increases debt from $100 million to $150 million resulting in a 70 percent leverage ratio. 
A) A buyout that increases debt from $100 million to $150 million resulting in a 25 percent leverage ratio. 
B) An investment project that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio. 
C) An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio. 
D) An acquisition that increases debt from $100 million to $150 million resulting in a 70 percent leverage ratio.

Question 2

Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT a reason for an 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. 
A) To reduce capital requirements. 
B) To avoid credit risk exposure. 
C) To control interest rate risk exposure. 
D) To avoid regulatory scrutiny.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

Accepted Answer

A) True 
 B)False

Question 7

An originate-to-sell model when dealing with below investment grade companies is considered an attractive alternative for FIs,which have specialized credit monitoring skills,as compared with keeping the loans in their portfolio.

Accepted Answer

A) True 
 B)False

Question 8

Because a bad 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 9

Which of the following is true concerning loans sold with recourse?

Accepted Answer

A) Most loans are sold with recourse. 
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. 
D) The FI that originated the loan retains a contingent credit risk liability. 
A) Most loans are sold with recourse. 
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. 
D) The FI that originated the loan retains a contingent credit risk liability.

Question 10

The definition of a highly leveraged transaction (HLT)loan as adopted by U.S.bank regulators in 1989 includes

Accepted Answer

A) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent. 
B) involving a buyout,acquisition,or recapitalization. 
C) results in a leverage ratio higher than 75 percent. 
D) All of the options. 
A) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent. 
B) involving a buyout,acquisition,or recapitalization. 
C) results in a leverage ratio higher than 75 percent. 
D) All of the options.

Question 11

Loans originated by domestic U.S.banks cannot be sold to foreign banks.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

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. 
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.

Question 14

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) The federal government takeover of Fannie Mae and Freddie Mac means that the loans held by these agencies can never be sold to other entities. 
C) 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. 
D) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
A) There is an increased trend to apply credit ratings to loans offered for sale,increasing the attractiveness to secondary market purchasers. 
B) The federal government takeover of Fannie Mae and Freddie Mac means that the loans held by these agencies can never be sold to other entities. 
C) 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. 
D) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell.

Question 15

Loan assignments make up more than 90 percent of the U.S.domestic 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. 
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.

Question 16

If an FI embraces the concept of good bank/bad bank,

Accepted Answer

A) bad bank assets are passed on to the institutions correspondent bank that is required to accept the assets. 
B) good bank assets are organized into a closed end mutual fund which then sells shares to raise funds for the bad bank. 
C) the bad bank is a special purpose vehicle (SPV)that is organized to liquidate non-performing loans. 
D) the bad bank assets are funded by FDIC insured deposits. 
A) bad bank assets are passed on to the institutions correspondent bank that is required to accept the assets. 
B) good bank assets are organized into a closed end mutual fund which then sells shares to raise funds for the bad bank. 
C) the bad bank is a special purpose vehicle (SPV)that is organized to liquidate non-performing loans. 
D) the bad bank assets are funded by FDIC insured deposits.

Question 17

An FI that sells a loan with recourse retains ownership of the loan.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following transactions does NOT meet the legal definition of a highly leveraged transaction (HLT)?

Accepted Answer

A) A buyout that increases debt from $100 million to $150 million resulting in a 55 percent leverage ratio. 
B) A recapitalization that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio. 
C) An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio. 
D) An acquisition that increases debt from $100 million to $150 million resulting in an 80 percent leverage ratio. 
A) A buyout that increases debt from $100 million to $150 million resulting in a 55 percent leverage ratio. 
B) A recapitalization that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio. 
C) An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio. 
D) An acquisition that increases debt from $100 million to $150 million resulting in an 80 percent leverage ratio.

Question 19

Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 25: Loan Sales

Which of the following transactions meets the legal definition of a highly leveraged transaction (HLT)?

Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.

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

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

Which observation is true of vulture funds?

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

An originate-to-sell model when dealing with below investment grade companies is considered an attractive alternative for FIs,which have specialized credit monitoring skills,as compared with keeping the loans in their portfolio.

Because a bad 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.

Which of the following is true concerning loans sold with recourse?

The definition of a highly leveraged transaction (HLT)loan as adopted by U.S.bank regulators in 1989 includes

Loans originated by domestic U.S.banks cannot be sold to foreign banks.

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

Vulture funds are

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

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

If an FI embraces the concept of good bank/bad bank,

An FI that sells a loan with recourse retains ownership of the loan.

Which of the following transactions does NOT meet the legal definition of a highly leveraged transaction (HLT)?

Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.

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

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