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. 
E) have no restrictions placed on them. 
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. 
E) have no restrictions placed on them. A

Question 2

The buyer of a loan participation bears double monitoring costs.

Accepted Answer

A) True 
 B)False  True

Question 3

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. 
E) None of the above. 
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. 
E) None of the above. C

Question 4

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. 
E) They are term loans. 
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. 
E) They are term loans.

Question 5

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) Answers A and B only. 
E) Answers A and C only. 
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) Answers A and B only. 
E) Answers A and C only.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

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. 
E) $0. 
A) $1,200. 
B) $232. 
C) $132. 
D) $68. 
E) $0.

Question 11

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 12

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 13

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 14

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 15

Because a bad-bank 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 16

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

Accepted Answer

A) True 
 B)False

Question 17

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. 
E) are made in smaller denominations than are loan assignments. 
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. 
E) are made in smaller denominations than are loan assignments.

Question 18

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. 
E) generate reinvestment income. 
A) geographically diversify. 
B) decrease core deposits. 
C) lower reserve requirements. 
D) lower capital requirements. 
E) generate reinvestment income.

Question 19

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. 
E) Issued for 90 days or less. 
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. 
E) Issued for 90 days or less.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 25: Loan Sales

Loan sales by foreign banks

The buyer of a loan participation bears double monitoring costs.

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

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

A buyer of a loan participation is exposed to

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

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.

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?

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

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?

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

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

A type of company that specializes in distressed loans is

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

Because a bad-bank 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.

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

Loan participations

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

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

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

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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