Question 1

In a loan participation

Accepted Answer

A) the holder (buyer)is not a party to the underlying credit agreement,so the initial contract between the loan seller and the borrower remains in place after the sale. 
B) the holder (buyer)is a party to the underlying credit agreement,so the initial contract between the loan seller and the borrower remains in place after the sale. 
C) the holder (buyer)can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
D) the holder (buyer)is not a party to the underlying credit agreement,so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer)can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
A) the holder (buyer)is not a party to the underlying credit agreement,so the initial contract between the loan seller and the borrower remains in place after the sale. 
B) the holder (buyer)is a party to the underlying credit agreement,so the initial contract between the loan seller and the borrower remains in place after the sale. 
C) the holder (buyer)can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan. 
D) the holder (buyer)is not a party to the underlying credit agreement,so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer)can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan.

Question 2

Banks that sell many of their loans

Accepted Answer

A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach.

Question 3

Insurance companies and pension funds are important buyers of long-maturity loans.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Loan participations

Accepted Answer

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

Question 6

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 securitization. 
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 securitization. 
C) Selling of a loan creates a secondary market for loans. 
D) Ownership of the loan is always transferred to the loan purchaser.

Question 7

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.

Accepted Answer

A) True 
 B)False

Question 8

A loan credit rating is the same as bond credit rating in that it is based solely on the financial soundness of the underlying corporation.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is NOT a contractual mechanism used by FIs to control credit risks?

Accepted Answer

A) Diversifying across different types of risky borrowers. 
B) Requiring higher interest rate spreads for higher risk borrowers. 
C) Requiring more collateral for the bank over the assets of more risky borrowers. 
D) Making lending decisions only in centralized locations. 
A) Diversifying across different types of risky borrowers. 
B) Requiring higher interest rate spreads for higher risk borrowers. 
C) Requiring more collateral for the bank over the assets of more risky borrowers. 
D) Making lending decisions only in centralized locations.

Question 10

The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.

Accepted Answer

A) True 
 B)False

Question 11

The traditional interbank loan sale market has been shrinking for which of the following reasons?

Accepted Answer

A) The barriers to nationwide banking have been largely removed through legislation. 
B) Concerns about counterparty risk and moral hazard have increased. 
C) The traditional correspondent banking relationships are slowly breaking down. 
D) All of the options. 
A) The barriers to nationwide banking have been largely removed through legislation. 
B) Concerns about counterparty risk and moral hazard have increased. 
C) The traditional correspondent banking relationships are slowly breaking down. 
D) All of the options.

Question 12

HLT loans typically have all of the following characteristics except which of the following?

Accepted Answer

A) They have a short maturity of less than three months. 
B) They are secured by assets of the borrowing firm. 
C) They have floating rates tied to LIBOR or some other short-term index. 
D) They have strong covenant protection. 
A) They have a short maturity of less than three months. 
B) They are secured by assets of the borrowing firm. 
C) They have floating rates tied to LIBOR or some other short-term index. 
D) They have strong covenant protection.

Question 13

Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

Accepted Answer

A) True 
 B)False

Question 14

The definition of a highly leveraged transaction is any transaction that involves a buyout,acquisition or recapitalization.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following aided in allowing Federal Government Agencies (such as the FDIC)to sell loans of institutions for which the agency has become responsible?

Accepted Answer

A) National Banking Act. 
B) Financial Services Modernization Act. 
C) Savings Institutions Reform Act. 
D) Glass-Steagall Act. 
E) Federal Debt Collection Improvement Act. 
A) National Banking Act. 
B) Financial Services Modernization Act. 
C) Savings Institutions Reform Act. 
D) Glass-Steagall Act. 
E) Federal Debt Collection Improvement Act.

Question 16

A loan sale occurs when an FI originates a loan and sells the loan without recourse to an outside buyer.

Accepted Answer

A) True 
 B)False

Exam 25: Loan Sales

In a loan participation

Banks that sell many of their loans

Insurance companies and pension funds are important buyers of long-maturity loans.

The move toward market value accounting

Loan participations

Which of the following observations is NOT correct?

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.

A loan credit rating is the same as bond credit rating in that it is based solely on the financial soundness of the underlying corporation.

Which of the following is NOT a contractual mechanism used by FIs to control credit risks?

The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.

The traditional interbank loan sale market has been shrinking for which of the following reasons?

HLT loans typically have all of the following characteristics except which of the following?

Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

The definition of a highly leveraged transaction is any transaction that involves a buyout,acquisition or recapitalization.

Which of the following aided in allowing Federal Government Agencies (such as the FDIC)to sell loans of institutions for which the agency has become responsible?

A loan sale occurs when an FI originates a loan and sells the loan without recourse to an outside buyer.

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