Question 1

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. 
E) has no impact on the banks' incentives to sell loans. 
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. 
E) has no impact on the banks' incentives to sell loans.

Question 2

The traditional interbank loan sale market has been growing rapidly due to an increase in the number of mergers and acquisitions.

Accepted Answer

A) True 
 B)False

Question 3

Historically, correspondent banking relationships have been important in the sale of bank loans.

Accepted Answer

A) True 
 B)False

Question 4

Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds.
-If the proceeds of the loan sale are used to pay off purchased funds, what will be the balance of the purchased funds for Good Bank after the transaction?

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 5

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

Question 6

Loan sales do not completely protect the lending FI from credit risk exposure because

Accepted Answer

A) defaults may reduce the ability of the lending bank to sell loans in the future. 
B) a loan sale contains an implicit quality guarantee by the lending FI. 
C) loans are always sold with recourse. 
D) regulators require the lending FI to make restitution for defaulted loans. 
E) loan sales force the FI to mark its remaining loans to market prices. 
A) defaults may reduce the ability of the lending bank to sell loans in the future. 
B) a loan sale contains an implicit quality guarantee by the lending FI. 
C) loans are always sold with recourse. 
D) regulators require the lending FI to make restitution for defaulted loans. 
E) loan sales force the FI to mark its remaining loans to market prices.

Question 7

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

Question 8

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

Accepted Answer

A) Window. 
B) Financial distress. 
C) Foreclosure. 
D) Recession. 
E) Assignment. 
A) Window. 
B) Financial distress. 
C) Foreclosure. 
D) Recession. 
E) Assignment.

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. 
E) The loan sale is technically removed from the balance sheet. 
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. 
E) The loan sale is technically removed from the balance sheet.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

Accepted Answer

A) True 
 B)False

The move toward market value accounting

The traditional interbank loan sale market has been growing rapidly due to an increase in the number of mergers and acquisitions.

Historically, correspondent banking relationships have been important in the sale of bank loans.

Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds. -If the proceeds of the loan sale are used to pay off purchased funds, what will be the balance of the purchased funds for Good Bank after the transaction?

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

Loan sales do not completely protect the lending FI from credit risk exposure because

In a loan participation

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

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

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

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

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

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

Exam 25: Loan Sales

The move toward market value accounting

The traditional interbank loan sale market has been growing rapidly due to an increase in the number of mergers and acquisitions.

Historically, correspondent banking relationships have been important in the sale of bank loans.

Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds. -If the proceeds of the loan sale are used to pay off purchased funds, what will be the balance of the purchased funds for Good Bank after the transaction?

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

Loan sales do not completely protect the lending FI from credit risk exposure because

In a loan participation

Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?

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

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

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

Most loans originated and sold in the short-term market are secured loans to below investment grade entities.

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