Question 1

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 options. 
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 options. C

Question 2

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. D

Question 3

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  False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

The buyer of a loan participation bears double monitoring costs.

Accepted Answer

A) True 
 B)False

Question 10

Banks began selling short-term loans only since the passage of the Financial Services Modernization Act in 1999.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?

Accepted Answer

A) Participations and assignments. 
B) Participations and originations. 
C) Syndications and originations. 
D) Transfers and assignments. 
E) Exercise and transfers. 
A) Participations and assignments. 
B) Participations and originations. 
C) Syndications and originations. 
D) Transfers and assignments. 
E) Exercise and transfers.

Question 14

When an FI sells the loan of an individual corporation in the secondary market, the corporation's stock often decreases in value.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 26: Loan Sales

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

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

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.

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

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

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.

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

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

The buyer of a loan participation bears double monitoring costs.

Banks began selling short-term loans only since the passage of the Financial Services Modernization Act in 1999.

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

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

What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?

When an FI sells the loan of an individual corporation in the secondary market, the corporation's stock often decreases in value.

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

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

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

Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.

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

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

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

Fintech 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