Question 1

One way to boost the capital to assets ratio of an FI is through loan sales.

Accepted Answer

A) True 
 B)False

Question 2

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated from the FIs balance sheet.

Accepted Answer

A) True 
 B)False

Question 3

A type of company that recently has moved from only purchasing loans on the secondary market into primary loan syndication 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 4

Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?

Accepted Answer

A) Federal Debt Collection Improvements Act. 
B) Financial Services Modernization Act. 
C) The Bank Holding Company Act. 
D) Depository Institutions Deregulation and Monetary Control Act. 
E) Financial Institutions Reform Recovery and Enforcement Act. 
A) Federal Debt Collection Improvements Act. 
B) Financial Services Modernization Act. 
C) The Bank Holding Company Act. 
D) Depository Institutions Deregulation and Monetary Control Act. 
E) Financial Institutions Reform Recovery and Enforcement Act.

Question 5

Which of the following is NOT a reason for FIs to sell loans?

Accepted Answer

A) Loan diversification. 
B) To reduce required reserves. 
C) To reduce required capital. 
D) To reduce costs of credit risk assessment. 
E) To provide liquidity. 
A) Loan diversification. 
B) To reduce required reserves. 
C) To reduce required capital. 
D) To reduce costs of credit risk assessment. 
E) To provide liquidity.

Question 6

The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.

Accepted Answer

A) True 
 B)False

Question 7

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 8

The definition of a highly leveraged transaction (HLT) loan as adopted by U.S.bank regulators in 1989 includes

Accepted Answer

A) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent. 
B) involving a buyout, acquisition, or recapitalization. 
C) results in a leverage ratio higher than 75 percent. 
D) All of the options. 
E) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent and involving a buyout, acquisition, or recapitalization. 
A) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent. 
B) involving a buyout, acquisition, or recapitalization. 
C) results in a leverage ratio higher than 75 percent. 
D) All of the options. 
E) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent and involving a buyout, acquisition, or recapitalization.

Question 9

The traditional interbank loan sale market has been shrinking for which of the following reasons?

Accepted Answer

A) The barriers to nationwide banking have been largely removed through legislation. 
B) Concerns about counterparty risk and moral hazard have increased. 
C) The traditional correspondent banking relationships are slowly breaking down. 
D) All of the options. 
E) Concerns about counterparty risk and moral hazard have increased, and the traditional correspondent banking relationships are slowly breaking down. 
A) The barriers to nationwide banking have been largely removed through legislation. 
B) Concerns about counterparty risk and moral hazard have increased. 
C) The traditional correspondent banking relationships are slowly breaking down. 
D) All of the options. 
E) Concerns about counterparty risk and moral hazard have increased, and the traditional correspondent banking relationships are slowly breaking down.

Question 10

HLT loans typically have all of the following characteristics except which of the following?

Accepted Answer

A) They have a short maturity of less than three months. 
B) They are secured by assets of the borrowing firm. 
C) They have floating rates tied to LIBOR or some other short-term index. 
D) They have strong covenant protection. 
E) They are term loans. 
A) They have a short maturity of less than three months. 
B) They are secured by assets of the borrowing firm. 
C) They have floating rates tied to LIBOR or some other short-term index. 
D) They have strong covenant protection. 
E) They are term loans.

Question 11

Banks are able to incrementally remove risk from their balance sheets, allowing for business growth by selling non-performing loans to institutional investors.

Accepted Answer

A) True 
 B)False

Question 12

The unique features of participations in loans are:

Accepted Answer

A) the buyer is not a party to the underlying credit agreement so that the initial contract between loan seller and borrower remains in place after the sale. 
B) The loan buyer can exercise only partial control over changes in the loan contract's terms. 
C) The holder can vote only on material changes to the loan contract, such as the interest rate or collateral backing. 
D) all of the above are features. 
E) none of the above are features. 
A) the buyer is not a party to the underlying credit agreement so that the initial contract between loan seller and borrower remains in place after the sale. 
B) The loan buyer can exercise only partial control over changes in the loan contract's terms. 
C) The holder can vote only on material changes to the loan contract, such as the interest rate or collateral backing. 
D) all of the above are features. 
E) none of the above are features.

Question 13

Which observation is true of vulture funds?

Accepted Answer

A) Their decisions based on developing and maintaining long-term relationships. 
B) Their sole agenda is to helping the distressed firm to survive. 
C) Their investments are always passive. 
D) They are relationship based, not transaction driven. 
E) In a restructuring, they are looking for a return on capital invested. 
A) Their decisions based on developing and maintaining long-term relationships. 
B) Their sole agenda is to helping the distressed firm to survive. 
C) Their investments are always passive. 
D) They are relationship based, not transaction driven. 
E) In a restructuring, they are looking for a return on capital invested.

Question 14

The primary sellers of domestic loans are medium-sized regional banks.

Accepted Answer

A) True 
 B)False

Question 15

Investment banks are the predominant buyers of HLT loans because they are more informed agents in this market than other investors.

Accepted Answer

A) True 
 B)False

Question 16

Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest.

Accepted Answer

A) True 
 B)False

Question 17

Banks that sell many of their loans

Accepted Answer

A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
E) relinquish some of their roles as financial intermediaries. 
A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
E) relinquish some of their roles as financial intermediaries.

Exam 26: Loan Sales

One way to boost the capital to assets ratio of an FI is through loan sales.

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated from the FIs balance sheet.

A type of company that recently has moved from only purchasing loans on the secondary market into primary loan syndication is

Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?

Which of the following is NOT a reason for FIs to sell loans?

The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.

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

The definition of a highly leveraged transaction (HLT) loan as adopted by U.S.bank regulators in 1989 includes

The traditional interbank loan sale market has been shrinking for which of the following reasons?

HLT loans typically have all of the following characteristics except which of the following?

Banks are able to incrementally remove risk from their balance sheets, allowing for business growth by selling non-performing loans to institutional investors.

The unique features of participations in loans are:

Which observation is true of vulture funds?

The primary sellers of domestic loans are medium-sized regional banks.

Investment banks are the predominant buyers of HLT loans because they are more informed agents in this market than other investors.

Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest.

Banks that sell many of their loans

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