Question 1

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. D

Question 2

The sellers of domestic loans and HLT loans include all of the following EXCEPT

Accepted Answer

A) major money center banks. 
B) foreign banks. 
C) U.S. FDIC and other government agencies 
D) non-financial companies. 
E) investment banks. 
A) major money center banks. 
B) foreign banks. 
C) U.S. FDIC and other government agencies 
D) non-financial companies. 
E) investment banks. D

Question 3

Which of the following is NOT a factor that may tend to increase loan sales in the future?

Accepted Answer

A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B) The federal government takeover of Fannie Mae and Freddie Mac means that the loans held by these agencies can never be sold to other entities. 
C) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
D) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
E) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell commercial loans to decrease their amount of risky assets. 
A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B) The federal government takeover of Fannie Mae and Freddie Mac means that the loans held by these agencies can never be sold to other entities. 
C) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
D) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
E) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell commercial loans to decrease their amount of risky assets. B

Question 4

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 5

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 6

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 7

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 these. 
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 these.

Question 8

Good Bank:   Bad Bank:   Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds. If the proceeds of the loan sale are used to pay off purchased funds, what will be the balance of the purchased funds for Good Bank after the transaction?

Accepted Answer

A) $1,200. 
B) $232. 
C) $132. 
D) $68. 
E) $0. 
A) $1,200. 
B) $232. 
C) $132. 
D) $68. 
E) $0.

Question 9

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

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 these. 
E) None of these. 
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 these. 
E) None of these.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

An originate-to-distribute 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 18

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 these. 
E) None of these. 
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 these. 
E) None of these.

Question 19

The buyer of a loan participation bears double monitoring costs.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 25: Loan Sales

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

The sellers of domestic loans and HLT loans include all of the following EXCEPT

Which of the following is NOT a factor that may tend to increase loan sales in the future?

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

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

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

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

Good Bank: Bad Bank: Bad Bank buys the bad loans for $232. The proceeds of the loan sale are used by Good Bank to pay off purchased funds. If the proceeds of the loan sale are used to pay off purchased funds, what will be the balance of the purchased funds for Good Bank after the transaction?

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

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

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

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

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

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

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

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

An originate-to-distribute 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 definition of a highly leveraged transaction (HLT) loan as adopted by U.S. bank regulators in 1989 includes

The buyer of a loan participation bears double monitoring costs.

A type of company that specializes in distressed loans is

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