Question 1

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

Question 2

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.

Accepted Answer

A) True 
 B)False

Question 5

Banks and FIs rely on which of the following contractual mechanisms to control the credit risks of lending?

Accepted Answer

A) requiring higher interest rate spreads and fees on loans to more risky borrowers. 
B) restricting or rationing loans to more risky borrowers 
C) requiring enhanced seniority for the bank over assets of risky borrowers 
D) diversifying across different types of risky borrowers 
E) all of the above are utilized. 
A) requiring higher interest rate spreads and fees on loans to more risky borrowers. 
B) restricting or rationing loans to more risky borrowers 
C) requiring enhanced seniority for the bank over assets of risky borrowers 
D) diversifying across different types of risky borrowers 
E) all of the above are utilized.

Question 6

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 7

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 8

Banks and other FIs sell loans because of all of the following EXCEPT

Accepted Answer

A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
E) increase in fee income through brokerage functions. 
A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
E) increase in fee income through brokerage functions.

Question 9

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 10

Although a loan sale strategy for an FI may reduce or eliminate credit risk, the strategy does not affect the FI's liquidity risk.

Accepted Answer

A) True 
 B)False

Question 11

Identify the correct observation.

Accepted Answer

A) Most loan sales are completed in less than 30 days. 
B) Up to 50 percent of loan sales eventually fail to be completed at all. 
C) There is no incentive to renege on a loan sales contract. 
D) The tendency to renege on a loan sales contract decrease as market prices move away from those originally agreed. 
E) Contractual problems, trading frictions, and costs rarely affect loan sales. 
A) Most loan sales are completed in less than 30 days. 
B) Up to 50 percent of loan sales eventually fail to be completed at all. 
C) There is no incentive to renege on a loan sales contract. 
D) The tendency to renege on a loan sales contract decrease as market prices move away from those originally agreed. 
E) Contractual problems, trading frictions, and costs rarely affect loan sales.

Question 12

Which of the following is NOT true of loan assignments?

Accepted Answer

A) All rights are transferred on sale. 
B) The loan buyer holds a direct claim on the borrower. 
C) Transfer of U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) Ownership rights are generally much clearer in a loan sale by assignment. 
E) Contract terms are unrestrictive from the seller's perspective. 
A) All rights are transferred on sale. 
B) The loan buyer holds a direct claim on the borrower. 
C) Transfer of U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) Ownership rights are generally much clearer in a loan sale by assignment. 
E) Contract terms are unrestrictive from the seller's perspective.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The implementation of BIS capital requirements may be expected to

Accepted Answer

A) increase the downward trend in loan sales because of higher required capital levels. 
B) increase the downward trend in loan sales because of the use of risk adjusted assets. 
C) decrease the downward trend in loan sales because of the use of risk adjusted assets. 
D) decrease the downward trend in loan sales because of higher required capital levels. 
E) decrease the downward trend in loan sales because of the use of risk adjusted assets and because of higher required capital levels. 
A) increase the downward trend in loan sales because of higher required capital levels. 
B) increase the downward trend in loan sales because of the use of risk adjusted assets. 
C) decrease the downward trend in loan sales because of the use of risk adjusted assets. 
D) decrease the downward trend in loan sales because of higher required capital levels. 
E) decrease the downward trend in loan sales because of the use of risk adjusted assets and because of higher required capital levels.

Question 15

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 16

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 17

Loan sales do not create a new type of security as with other methods to manage credit risk.

Accepted Answer

A) True 
 B)False

Question 18

Loan sales by an FI are another tool to manage credit risk of the FI.

Accepted Answer

A) True 
 B)False

Question 19

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 20

Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.

Accepted Answer

A) True 
 B)False

Exam 26: Loan Sales

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

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

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

Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.

Banks and FIs rely on which of the following contractual mechanisms to control the credit risks of lending?

Loan assignments

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

Banks and other FIs sell loans because of all of the following EXCEPT

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

Although a loan sale strategy for an FI may reduce or eliminate credit risk, the strategy does not affect the FI's liquidity risk.

Identify the correct observation.

Which of the following is NOT true of loan assignments?

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

The implementation of BIS capital requirements may be expected to

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

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

Loan sales do not create a new type of security as with other methods to manage credit risk.

Loan sales by an FI are another tool to manage credit risk of the FI.

Which of the following observations is NOT correct?

Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary 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