Question 1

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. 
E) Loan sales do not involve the creation of new types of securities. 
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. 
E) Loan sales do not involve the creation of new types of securities.

Question 2

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

Accepted Answer

A) True 
 B)False

Question 3

A loan made to finance a merger and acquisition that usually results in a high leverage ratio for the borrower is a

Accepted Answer

A) loan sold without recourse. 
B) highly leveraged transaction loan. 
C) loan sold with recourse. 
D) loan assignment transaction. 
E) loan participation transaction. 
A) loan sold without recourse. 
B) highly leveraged transaction loan. 
C) loan sold with recourse. 
D) loan assignment transaction. 
E) loan participation transaction.

Question 4

Highly leveraged transaction (HLT) loans typically are used to finance new fixed assets of an ongoing firm.

Accepted Answer

A) True 
 B)False

Question 5

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 6

The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 above. 
E) Only two of the above. 
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 above. 
E) Only two of the above.

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. 
E) Placing more restrictive covenants on the actions of more risky borrowers. 
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. 
E) Placing more restrictive covenants on the actions of more risky borrowers.

Question 10

Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?

Accepted Answer

A) Federal Debt Collection Improvements Act. 
B) Financial Services Modernization Act. 
C) The Bank Holding Company Act. 
D) Depository Institutions Deregulation and Monetary Control Act. 
E) Financial Institutions Reform Recovery and Enforcement Act. 
A) Federal Debt Collection Improvements Act. 
B) Financial Services Modernization Act. 
C) The Bank Holding Company Act. 
D) Depository Institutions Deregulation and Monetary Control Act. 
E) Financial Institutions Reform Recovery and Enforcement Act.

Question 11

As of 2010, the Department of Housing and Urban Development (HUD) no longer sells loans that were used to purchase multifamily apartment properties.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Most vulture funds are formed by the mutual fund industry as a way around SEC restrictions from participating in the FI-originated loan sales market.

Accepted Answer

A) True 
 B)False

Question 14

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

Accepted Answer

A) Participations. 
B) Originations. 
C) Syndications. 
D) Assignments. 
E) Transfers. 
A) Participations. 
B) Originations. 
C) Syndications. 
D) Assignments. 
E) Transfers.

Question 15

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

Question 16

Loan assignments

Accepted Answer

A) are common in loan syndications. 
B) do not have buyer restrictions. 
C) comprise less than 30 percent of the U.S.loan sales market. 
D) involve extremely high monitoring costs. 
E) expose the buyer to a double risk and involve double monitoring costs. 
A) are common in loan syndications. 
B) do not have buyer restrictions. 
C) comprise less than 30 percent of the U.S.loan sales market. 
D) involve extremely high monitoring costs. 
E) expose the buyer to a double risk and involve double monitoring costs.

Question 17

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 amount of equity on the balance sheet 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 18

Why do spreads on HLT loans behave more like investment-grade bonds than like high-yield bonds?

Accepted Answer

A) They tend to be more junior in bankruptcy. 
B) They tend to have greater collateral backing than do high-yield bonds. 
C) Because no bank makes a market in this debt. 
D) Because securities firms do not make a market in this debt. 
E) They tend to have no covenant protection. 
A) They tend to be more junior in bankruptcy. 
B) They tend to have greater collateral backing than do high-yield bonds. 
C) Because no bank makes a market in this debt. 
D) Because securities firms do not make a market in this debt. 
E) They tend to have no covenant protection.

Question 19

Which of the following is NOT a reason for a 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. 
E) To make it possible to lend large amounts to an individual borrower. 
A) To reduce capital requirements. 
B) To avoid credit risk exposure. 
C) To control interest rate risk exposure. 
D) To avoid regulatory scrutiny. 
E) To make it possible to lend large amounts to an individual borrower.

Question 20

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

Accepted Answer

A) True 
 B)False

Exam 25: Loan Sales

Which of the following observations is NOT correct?

A distinction between distressed and non-distressed is usually made when selling highly leveraged transactions loans (HLTs).

A loan made to finance a merger and acquisition that usually results in a high leverage ratio for the borrower is a

Highly leveraged transaction (HLT) loans typically are used to finance new fixed assets of an ongoing firm.

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

The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.

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.

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

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

Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?

As of 2010, the Department of Housing and Urban Development (HUD) no longer sells loans that were used to purchase multifamily apartment properties.

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

Most vulture funds are formed by the mutual fund industry as a way around SEC restrictions from participating in the FI-originated loan sales market.

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

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

Loan assignments

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 amount of equity on the balance sheet of Good Bank after the sale of the loans?

Why do spreads on HLT loans behave more like investment-grade bonds than like high-yield bonds?

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

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

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