Question 1

What 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)  Ownership rights are generally much clearer in a loan sale by assignment.
D)  Contract terms are unrestrictive from the seller's perspective. D

Question 2

Choose the correct answer:

Accepted Answer

A)  Regulatory taxes such as reserve requirements create an incentive for banks to remove loans from the balance sheet by selling them without recourse to outside parties.
B)  Regulatory taxes such as reserve requirements create an incentive for banks to offer low rate mortgages.
C)  Regulatory taxes such as reserve requirements create an incentive for banks limit their lending to large corporates only.
D)  None of the listed options are correct. A

Question 3

In Australia, a securitisation program must have:
A)a specifically created SPV, which is resident in Australia and which is not required to provide data to the Australian Prudential Regulation Authority (APRA):
B)a specifically created SPV, which may or may not be resident in Australia and which is not required to provide data to the Australian Securities and Investment Commission (ASIC) under the Financial Statistics (Collection of Data) Act;
C)specifically selected assets (e.g.mortgages, receivables, etc.) backing its liabilities in the form of debt securities.
D)a specifically created SPV, which is resident in Australia, which is not required to provide data to the Australian Prudential Regulation Authority and have Specifically selected assets (e.g.mortgages, receivables, etc.) backing its liabilities in the form of debt securities.

Accepted Answer

D

Question 4

Loan participations are:

Accepted Answer

A)  riskier than loan assignments.
B)  less risky than loan assignments.
C)  always sold without recourse.
D)  always sold with partial recourse.

Question 5

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 securitisation.
C)  Selling of a loan creates a secondary market for loans.
D)  Ownership of the loan is always transferred to the loan purchaser.

Question 6

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

Accepted Answer

A)  participations
B)  originations
C)  syndications
D)  assignments

Question 7

This propensity to prepay means:

Accepted Answer

A)  realised coupons/cash flows on pass-through securities would conform to expected cash flows.
B)  realised coupons/cash flows on pass-through securities can often deviate substantially from the stated or expected coupon flows.
C)  realised coupons/cash flows on pass-through securities are prepaid.
D)  None of the listed options are correct.

Question 8

Assignments:

Accepted Answer

A)  are common in loan syndications.
B)  do not have buyer restrictions.
C)  comprise less than 30 per cent of the US loan sales market.
D)  involve extremely high monitoring costs.

Question 9

Timing insurance is a liquidity support provided to the special purpose vehicle to cover mismatches of cash flows:

Accepted Answer

A)  from its accounts receivable and accounts payable to all stake holders.
B)  from its investment income and current liabilities.
C)  between the underlying mortgage pool and those required to be paid on the securitised assets.
D)  None of the listed options are correct.

Question 10

Transferable mortgage is:

Accepted Answer

A)  a mortgage contract that allows a change of asset to be sold.
B)  a mortgage contract that does not allow a change of asset to be mortgaged.
C)  a mortgage contract that allows a change of asset to be mortgaged.
D)  None of the listed options are correct.

Question 11

The profitability of securitised assets is largely determined by the special purpose vehicle's:

Accepted Answer

A)  debt to equity ratio.
B)  credit rating.
C)  ownership.
D)  timing insurance.

Question 12

When current mortgage rates fall sufficiently low that the present value savings of refinancing outweigh the cost of prepayment penalties(and other fees and costs), the mortgage holders are said to have a valuable:

Accepted Answer

A)  put option.
B)  call option.
C)  forward agreement.
D)  futures contract.

Question 13

In a loan participation the holder (buyer):

Accepted Answer

A)  is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale
B)  is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale.
C)  can vote only on material changes to the loan contract such as changes in interest rate or collateral backing.
D)  is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer)  can vote only on material changes to the loan contract such as changes in interest rate or collateral backing.

Question 14

Collateralised debt obligation (CDO) is:

Accepted Answer

A)  an asset-backed bond issued in multiple classes or tranches.
B)  a mortgage issued in multiple classes or tranches.
C)  unsecured notes issued in multiple classes or tranches.
D)  commercial paper issued with collateral.

Question 15

Choose the correct answer:

Accepted Answer

A)  While pass-throughs and CMOs remain on banks and building societies balance sheets, mortgage-backed bonds (MBBs)  remove mortgages from balance sheets as forms of off-balance-sheet securitisation.
B)  While pass-throughs and CMOs help banks and building societies remove mortgages from their balance sheets as forms of off-balance-sheet securitisation, mortgage-backed bonds (MBBs)  normally remain on the balance sheet.
C)  Pass-throughs and CMOs are the same as mortgage-backed bonds (MBBs) .
D)  None of the listed options are correct.

Question 16

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.

Question 17

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 and because of higher required capital
D)  decrease the downward trend in loan sales because of the use of risk adjusted assets and because of lower required capital levels.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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.

Question 20

Fully amortised means:

Accepted Answer

A)  periodic repayment on a loan that reflects only principal over the life of the loan.
B)  a repayment on a loan with varying amounts, that reflects part interest and part principal over the life of the loan.
C)  an equal periodic repayment on a loan that reflects part interest and part principal over the life of the loan.
D)  None of the listed options are correct.

Exam 8: Credit Risk I: Individual Loan Risk

What is NOT true of loan assignments?

Choose the correct answer:

Loan participations are:

Which of the following observations is not correct?

Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.

This propensity to prepay means:

Assignments:

Timing insurance is a liquidity support provided to the special purpose vehicle to cover mismatches of cash flows:

Transferable mortgage is:

The profitability of securitised assets is largely determined by the special purpose vehicle's:

When current mortgage rates fall sufficiently low that the present value savings of refinancing outweigh the cost of prepayment penalties(and other fees and costs) , the mortgage holders are said to have a valuable:

In a loan participation the holder (buyer) :

Collateralised debt obligation (CDO) is:

Choose the correct answer:

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

The implementation of BIS capital requirements may be expected to:

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

The move toward market value accounting:

Fully amortised means: