Question 1

Important buyers of loans include all but which one of the following?

Accepted Answer

A) Foreign banks 
B) Insurance companies 
C) Closed-end bank loan mutual funds 
D) Vulture funds 
E) Credit unions 
A) Foreign banks 
B) Insurance companies 
C) Closed-end bank loan mutual funds 
D) Vulture funds 
E) Credit unions

Question 2

In 2008,loan sales primarily consisted of sales of distressed loans.

Accepted Answer

A) True 
 B)False

Question 3

The sale or transfer of assets at less than fair value that occurs at a time when the seller is insolvent is termed fraudulent conveyance.

Accepted Answer

A) True 
 B)False

Question 4

Under current reserve requirements,bank loan sales with recourse are considered a liability and are subject to reserve requirements.

Accepted Answer

A) True 
 B)False

Question 5

The sum of the market values of all the classes of a CMO is greater than the total value of the GNMA pass-throughs backing the CMO because

Accepted Answer

A) the CMO has less credit risk than the pass-through. 
B) CMO investors can choose their degree of prepayment protection. 
C) the government guarantees CMOs' performance. 
D) CMOs have a more favorable tax status than pass-throughs. 
E) CMO investors have no prepayment risk. 
A) the CMO has less credit risk than the pass-through. 
B) CMO investors can choose their degree of prepayment protection. 
C) the government guarantees CMOs' performance. 
D) CMOs have a more favorable tax status than pass-throughs. 
E) CMO investors have no prepayment risk.

Question 6

A pass-through security is best characterized as

Accepted Answer

A) a multiclass mortgage-backed bond. 
B) a security with a pro rata claim to the underlying pool of assets. 
C) a bond backed by real estate. 
D) a part of a loan assignment. 
E) a part of a loan participation. 
A) a multiclass mortgage-backed bond. 
B) a security with a pro rata claim to the underlying pool of assets. 
C) a bond backed by real estate. 
D) a part of a loan assignment. 
E) a part of a loan participation.

Question 7

Why are most loan sales on an assignment basis rather than a participation basis?

Accepted Answer

Assignment provides the loan buyer with

Question 8

If a mortgage pass-through experiences smaller prepayments than expected early on in the life of the security,the result will be that pass-through holders will receive ________ than expected cash flows early on and ________ than expected cash flows later on.

Accepted Answer

A) greater; less 
B) greater; greater 
C) less; greater 
D) less; less 
E) less; no different 
A) greater; less 
B) greater; greater 
C) less; greater 
D) less; less 
E) less; no different

Question 9

With a GNMA pass-through,the investor bears ________ of the prepayment risk; with a non callable mortgage-backed bond,the investor bears ________ of the prepayment risk; and with a CMO,the investor bears ________ of the prepayment risk.

Accepted Answer

A) some; all; none 
B) all; some; none 
C) all; none; some 
D) none; some; all 
E) none; some; none 
A) some; all; none 
B) all; some; none 
C) all; none; some 
D) none; some; all 
E) none; some; none

Question 10

Banks were willing to swap LDC loans for Brady bonds because

Accepted Answer

A) Brady bonds carried higher interest rates than the loans. 
B) the bonds had variable interest rates. 
C) the bonds were marketable and the loans were not. 
D) the bonds were uncollateralized. 
E) None of the options are correct. 
A) Brady bonds carried higher interest rates than the loans. 
B) the bonds had variable interest rates. 
C) the bonds were marketable and the loans were not. 
D) the bonds were uncollateralized. 
E) None of the options are correct.

Question 11

Most loan sales are now accomplished in about 10 days.

Accepted Answer

A) True 
 B)False

Question 12

The buyer of a loan in a participation has a double-risk exposure: one to the borrower and one to the selling bank.

Accepted Answer

A) True 
 B)False

Question 13

Because of the government backing,investors in GNMA pass-throughs are guaranteed to earn at least the T-bill rate on their investments.

Accepted Answer

A) True 
 B)False

Question 14

A three-class sequential pay CMO has an initial principal balance of $30 million per class. In the first month,interest payments of $5 million and principal payments of $2 million are received. In the second month,Class A holders receive interest on ________ principal and Class B holders receive interest on ________ principal.

Accepted Answer

A) $30 million; $30 million 
B) $28 million; $28 million 
C) $27 million; $27 million 
D) $28 million; $30 million 
E) $30 million; $28 million 
A) $30 million; $30 million 
B) $28 million; $28 million 
C) $27 million; $27 million 
D) $28 million; $30 million 
E) $30 million; $28 million

Question 15

Loan sales are likely to continue because
I. they can increase near-term reported earnings.
II. they reduce the amount of capital required.
III. more corporate borrowers have access to the commercial paper market.

Accepted Answer

A) I and II only 
B) II and III only 
C) I and III only 
D) II only 
E) I,II,and III 
A) I and II only 
B) II and III only 
C) I and III only 
D) II only 
E) I,II,and III

Question 16

A three-class CMO has Class A,Class B,and Class C securities outstanding. Which class has the longest duration?

Accepted Answer

A) Class A 
B) Class B 
C) Class C 
D) Class B and Class C have the same duration. 
E) All of these choices are correct. 
A) Class A 
B) Class B 
C) Class C 
D) Class B and Class C have the same duration. 
E) All of these choices are correct.

Question 17

You own a mortgage-backed security and you will receive fixed semiannual interest payments and no principal payments as long as prepayments remain within a given range. If prepayments move outside the range,cash flows will vary. You must be holding a ________.

Accepted Answer

A) class C or lower sequential pay CMO 
B) PAC CMO 
C) PO security 
D) pass-through security 
E) CDO 
A) class C or lower sequential pay CMO 
B) PAC CMO 
C) PO security 
D) pass-through security 
E) CDO

Question 18

A form of trust that can issue multiple class debt securities without having to pay taxes on the interest paid is called a

Accepted Answer

A) CMO. 
B) REMIC. 
C) MBB. 
D) PIP. 
E) GNMA. 
A) CMO. 
B) REMIC. 
C) MBB. 
D) PIP. 
E) GNMA.

Question 19

Increased liquidity of bank loans,enhanced ability to manage the maturity gap and overcollateralization are some of the benefits of securitization.

Accepted Answer

A) True 
 B)False

Question 20

Which one of the following types of transactions leaves the assets on the balance sheet?

Accepted Answer

A) Loan sale without recourse 
B) GNMA pass-throughs backed by mortgages placed in trust 
C) CMOs issued using mortgage pool as collateral 
D) Mortgage-backed bonds issued 
E) None of the options are correct. 
A) Loan sale without recourse 
B) GNMA pass-throughs backed by mortgages placed in trust 
C) CMOs issued using mortgage pool as collateral 
D) Mortgage-backed bonds issued 
E) None of the options are correct.

Exam 24: Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Important buyers of loans include all but which one of the following?

In 2008,loan sales primarily consisted of sales of distressed loans.

The sale or transfer of assets at less than fair value that occurs at a time when the seller is insolvent is termed fraudulent conveyance.

Under current reserve requirements,bank loan sales with recourse are considered a liability and are subject to reserve requirements.

The sum of the market values of all the classes of a CMO is greater than the total value of the GNMA pass-throughs backing the CMO because

A pass-through security is best characterized as

Why are most loan sales on an assignment basis rather than a participation basis?

If a mortgage pass-through experiences smaller prepayments than expected early on in the life of the security,the result will be that pass-through holders will receive ________ than expected cash flows early on and ________ than expected cash flows later on.

With a GNMA pass-through,the investor bears ________ of the prepayment risk; with a non callable mortgage-backed bond,the investor bears ________ of the prepayment risk; and with a CMO,the investor bears ________ of the prepayment risk.

Banks were willing to swap LDC loans for Brady bonds because

Most loan sales are now accomplished in about 10 days.

The buyer of a loan in a participation has a double-risk exposure: one to the borrower and one to the selling bank.

Because of the government backing,investors in GNMA pass-throughs are guaranteed to earn at least the T-bill rate on their investments.

Loan sales are likely to continue because I. they can increase near-term reported earnings. II. they reduce the amount of capital required. III. more corporate borrowers have access to the commercial paper market.

A three-class CMO has Class A,Class B,and Class C securities outstanding. Which class has the longest duration?

You own a mortgage-backed security and you will receive fixed semiannual interest payments and no principal payments as long as prepayments remain within a given range. If prepayments move outside the range,cash flows will vary. You must be holding a ________.

A form of trust that can issue multiple class debt securities without having to pay taxes on the interest paid is called a

Increased liquidity of bank loans,enhanced ability to manage the maturity gap and overcollateralization are some of the benefits of securitization.

Which one of the following types of transactions leaves the assets on the balance sheet?

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Filters

If a mortgage pass-through experiences smaller prepayments than expected early on in the life of the security,the result will be that pass-through holders will receive than expected cash flows early on and than expected cash flows later on.

With a GNMA pass-through,the investor bears of the prepayment risk; with a non callable mortgage-backed bond,the investor bears of the prepayment risk; and with a CMO,the investor bears of the prepayment risk.