Question 1

Which of the following statements regarding assignments are true?

Accepted Answer

A) Buying a share in a loan syndication with some contractual control and rights over the borrower. 
B) All rights are transferred on sale, meaning the loan buyer now holds a direct claim on the borrower. 
C) Transfer to U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) all of the above statements are true. 
E) none of the above statements are true. 
A) Buying a share in a loan syndication with some contractual control and rights over the borrower. 
B) All rights are transferred on sale, meaning the loan buyer now holds a direct claim on the borrower. 
C) Transfer to U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) all of the above statements are true. 
E) none of the above statements are true.

Question 2

Besides reducing credit risks, an FI has an incentive to sell loans it originates for all of the following reasons EXCEPT to:

Accepted Answer

A) geographically diversify. 
B) decrease core deposits. 
C) lower reserve requirements. 
D) lower capital requirements. 
E) generate reinvestment income. 
A) geographically diversify. 
B) decrease core deposits. 
C) lower reserve requirements. 
D) lower capital requirements. 
E) generate reinvestment income.

Question 3

Because a bad-bank bank has a difficult time gaining deposits for funding, it also has a difficult time devising an optimal strategy to manage and dispose of bad assets.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

A type of company that specializes in distressed loans 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 8

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 9

Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

Accepted Answer

A) True 
 B)False

Question 10

In the sale of a loan to an investor/buyer, there are fewer agency costs associated with loan participation contracts than with loan assignment contracts.

Accepted Answer

A) True 
 B)False

Question 11

The definition of a highly leveraged transaction is any transaction that involves a buyout, acquisition or recapitalization.

Accepted Answer

A) True 
 B)False

Question 12

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.

Accepted Answer

A) True 
 B)False

Question 13

The Resolution Trust Corporation (RTC), a government agency formed to manage failed S&Ls in the early 1990s, followed a Good Bank/Bad Bank concept in the sale of loans.

Accepted Answer

A) True 
 B)False

Question 14

Loan participations

Accepted Answer

A) are riskier than loan assignments. 
B) are less risky than loan assignments. 
C) are always sold without recourse. 
D) are always sold with partial recourse. 
E) are made in smaller denominations than are loan assignments. 
A) are riskier than loan assignments. 
B) are less risky than loan assignments. 
C) are always sold without recourse. 
D) are always sold with partial recourse. 
E) are made in smaller denominations than are loan assignments.

Question 15

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 16

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

FIs discourage borrowers from hedging their own risk of default.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 26: Loan Sales

Which of the following statements regarding assignments are true?

Besides reducing credit risks, an FI has an incentive to sell loans it originates for all of the following reasons EXCEPT to:

Because a bad-bank bank has a difficult time gaining deposits for funding, it also has a difficult time devising an optimal strategy to manage and dispose of bad assets.

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.

The move toward market value accounting

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

A type of company that specializes in distressed loans is

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

Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.

In the sale of a loan to an investor/buyer, there are fewer agency costs associated with loan participation contracts than with loan assignment contracts.

The definition of a highly leveraged transaction is any transaction that involves a buyout, acquisition or recapitalization.

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.

The Resolution Trust Corporation (RTC), a government agency formed to manage failed S&Ls in the early 1990s, followed a Good Bank/Bad Bank concept in the sale of loans.

Loan participations

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

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

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

FIs discourage borrowers from hedging their own risk of default.

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

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.

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