Question 1

The primary sellers of domestic loans are medium-sized regional banks.

Accepted Answer

A) True 
 B)False

Question 2

The major buyers of U.S. domestic loans of non-distressed companies include all of the following EXCEPT

Accepted Answer

A) domestic banks. 
B) foreign banks. 
C) the Resolution Trust Corporation. 
D) non-financial companies. 
E) closed-end bank loan mutual funds. 
A) domestic banks. 
B) foreign banks. 
C) the Resolution Trust Corporation. 
D) non-financial companies. 
E) closed-end bank loan mutual funds.

Question 3

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 4

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 5

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. 
E) there is no secondary market in 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. 
E) there is no secondary market in loan participations.

Question 6

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

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

Question 10

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. 
E) companies offering burial insurance contracts. 
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. 
E) companies offering burial insurance contracts.

Question 11

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. 
E) the bad bank is placed under the supervision of the Resolution Trust Corporation. 
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. 
E) the bad bank is placed under the supervision of the Resolution Trust Corporation.

Question 12

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. 
E) An investment project that results in an 80 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. 
E) An investment project that results in an 80 percent leverage ratio.

Question 13

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. 
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

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 15

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. 
E) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell commercial loans to decrease their amount of risky assets. 
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. 
E) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell commercial loans to decrease their amount of risky assets.

Question 16

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

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

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. 
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 20

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

Exam 25: Loan Sales

The primary sellers of domestic loans are medium-sized regional banks.

The major buyers of U.S. domestic loans of non-distressed companies include all of the following EXCEPT

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

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.

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

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.

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

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.

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

Vulture funds are

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

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

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

Which observation is true of vulture funds?

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

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

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

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

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

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.

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