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Banking
Q:
Which of these CMO issues has characteristics of both a zero-coupon bond and a regular bond?
A. Class A bonds.
B. Class B bonds.
C. Class C bonds.
D. Class Z bonds.
E. None of the above.
Q:
These bonds have some prepayment protection and expected durations of five to seven years depending on the level of interest rates and are primarily purchased by pension funds and life insurance companies.
A. Class A bonds.
B. Class R bonds.
C. Class C bonds.
D. Class Z bonds.
E. Class B bonds.
Q:
Why are the class C bonds highly attractive to insurance companies and pension funds?
A. Because of their ability to offer perfect prepayment protection.
B. Because of the shortest average life with a minimum of prepayment protection.
C. Because of their long expected duration.
D. Because they are basically zero coupon bonds and hence carry a minimum amount of risk.
E. Answers A and D only.
Q:
In regard to a CMO, which of the following have the shortest average life with a minimum of prepayment protection?
A. Class A bonds.
B. Class B bonds.
C. Class C bonds.
D. Class Z bonds.
E. Class R bonds.
Q:
Why are the regular GNMA pass-throughs not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?
A. Because of their short expected duration.
B. Because these bonds have the shortest average life with a maximum of prepayment protection.
C. Because they are zero coupon bonds and hence carry maximum amount of risk.
D. Because of their failures to offer prepayment protection.
E. Bondholders receive the promised coupon and principal payments but are not entitled to accrued interest payments.
Q:
Which of the following is true concerning an assumable mortgage?
A. The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.
B. The mortgage contract is transferred from the seller to the buyer of a house.
C. The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.
D. A mortgage-backed bond issued in multiple classes or tranches.
E. Bonds collateralized by a pool of assets.
Q:
Which of the following best explains the term burn-out factor?
A. The percent of mortgage contract that is transferred from the seller to the buyer of a house.
B. The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.
C. The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.
D. A mortgage-backed bond issued in multiple classes or tranches.
E. Bonds collateralized by a pool of assets.
Q:
What is defined as the sum of the products of the time when principal payments are received and the amount of principal received all divided by total principal outstanding?
A. Weighted-average life.
B. Burn-out factor.
C. Degree of collateralization.
D. Option-adjusted spread.
E. Time to maturity.
Q:
Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.
A. PO strip.
B. IO strip.
C. Class B bonds
D. Class Z bonds
E. Class A bonds
Q:
A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is
A. a CARS.
B. an IO strip.
C. a CARD.
D. a PO strip.
E. a prepayment claim.
Q:
Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways?
A. The MBB bondholders have a junior claim to assets of the FI.
B. There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB.
C. The assets backing a MBB issue are normally removed from the balance sheet of the FI.
D. Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.
E. None of the above.
Q:
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?
A. $1,200.
B. $232.
C. $132.
D. $68.
E. $0.
Q:
What will be the amount of equity on the balance sheet of Good Bank after the sale of the loans?
A. $1,200.
B. $232.
C. $132.
D. $68.
E. $0.
Q:
What will be the total assets of Good Bank after the sale of the loans?
A. $1,200.
B. $232.
C. $132.
D. $68.
E. $0.
Q:
Which of the following is a reason for an FI to sell a residential real estate loan rather than securitize it through GNMA?
A. The loan is too large to meet securitization standards.
B. The loan is not insured by FHA or guaranteed by the VA.
C. The loan recipient's income cannot be verified.
D. The loan carries a non-standard adjustable interest rate.
E. All of the above.
Q:
Which of the following is NOT a factor that may tend to increase loan sales in the future?
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.
Q:
Which of the following aided in allowing Federal Government Agencies (such as the FDIC) to sell loans of institutions for which the agency has become responsible?
A. National Banking Act.
B. Financial Services Modernization Act.
C. Savings Institutions Reform Act.
D. Glass-Steagall Act.
E. Federal Debt Collection Improvement Act.
Q:
Banks and other FIs sell loans because of all of the following EXCEPT
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.
Q:
Banks that sell many of their loans
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.
Q:
The move toward market value accounting
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.
Q:
Loan sales by foreign banks
A. are forbidden in the U.S. domestic market.
B. must be of a certain size to be purchased by a domestic FI.
C. are allowed to be purchased by domestic FIs if the loan is to a highly-rated company.
D. must be of a certain duration, and be sold without recourse in order to be purchased by a domestic FI.
E. have no restrictions placed on them.
Q:
The growth of the commercial paper market has hurt the market for loan sales by
A. offering some borrowers alternatives to bank loans.
B. underpricing the banks that sell loans.
C. fostering the credit crunch.
D. adding another regulatory layer since the SEC requires shelf registration of new issues.
E. increasing moral hazard concerns in the market.
Q:
Loan sales do not completely protect the lending FI from credit risk exposure because
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.
Q:
The implementation of BIS capital requirements may be expected to
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. Answers C and D only.
Q:
Which of the following is NOT a reason for FIs to sell loans?
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.
Q:
Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?
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.
Q:
Which of the following is NOT a reason for using a bad bank as a vehicle to add value in the loan sale process?
A. Contracts for managers can be created to maximize the incentives to generate enhanced values from loan sales.
B. The bad bank enables bad assets to be managed by loan workout specialists.
C. The bad bank does not need to be concerned about liquidity needs since it does not have any deposits.
D. Moving the bad loans off the balance sheet of the good bank will improve the markets perception, and thus performance, of the good bank.
E. The good bank-bad bank structure increases information asymmetries regarding the value of the good bank's assets.
Q:
The principal objective in the creation of _____ is to maximize asset values by separating good loans from bad loans.
A. hedge funds
B. bad banks
C. vulture funds
D. structured banks
E. correspondent banks
Q:
If an FI embraces the concept of good bank/bad bank,
A. bad bank assets are passed on to the institutions correspondent bank that is required to accept the assets.
B. good bank assets are organized into a closed end mutual fund which then sells shares to raise funds for the bad bank.
C. the bad bank is a special purpose vehicle (SPV) that is organized to liquidate non-performing loans.
D. the bad bank assets are funded by FDIC insured deposits.
E. the bad bank is placed under the supervision of the Resolution Trust Corporation.
Q:
The sellers of domestic loans and HLT loans include all of the following EXCEPT
A. major money center banks.
B. foreign banks.
C. U.S. government and its agencies
D. non-financial companies.
E. investment banks.
Q:
The major buyers of U.S. domestic loans of non-distressed companies include all of the following EXCEPT
A. domestic banks.
B. foreign banks.
C. the Resolution Trust Corporation.
D. non-financial companies.
E. closed-end bank loan mutual funds.
Q:
Vulture funds are
A. management consulting firms that employ turn-around specialists.
B. portfolios consisting of stakes in distressed companies.
C. mutual funds that grow by acquiring their competitors.
D. mutual funds that invest only in highly-leveraged transactions.
E. companies offering burial insurance contracts.
Q:
The traditional interbank loan sale market has been shrinking for which of the following reasons?
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 above.
E. Only two of the above.
Q:
Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?
A. Bank loan mutual funds.
B. Credit unions.
C. Foreign banks.
D. Investment banks.
E. Vulture funds.
Q:
Which observation is true of vulture funds?
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.
Q:
A type of company that specializes in distressed loans is
A. a bank loan mutual fund.
B. a domestic bank.
C. a foreign bank.
D. an investment bank.
E. a vulture fund.
Q:
A type of company that recently has moved from only purchasing loans on the secondary market into primary loan syndication is
A. a bank loan mutual fund.
B. a domestic bank.
C. a foreign bank.
D. an investment bank.
E. a vulture fund.
Q:
A type of FI that predominantly buys HLT loans because these loans require the kinds of investment analysis skills used in other parts of the FI's business is
A. a bank loan mutual fund.
B. a domestic bank.
C. a foreign bank.
D. an investment bank.
E. a vulture fund.
Q:
Identify the correct observation.
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.
Q:
Loan assignments
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.
Q:
Which of the following is NOT true of loan assignments?
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.
Q:
Loan assignments make up more than 90 percent of the U.S. domestic loan sale market because
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.
Q:
HLT loans typically have all of the following characteristics except which of the following?
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.
Q:
Why do spreads on HLT loans behave more like investment-grade bonds than like high-yield bonds?
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.
Q:
Which of the following transactions does NOT meet the legal definition of a highly leveraged transaction (HLT)?
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.
Q:
Which of the following transactions meets the legal definition of a highly leveraged transaction (HLT)?
A. A buyout that increases debt from $100 million to $150 million resulting in a 25 percent leverage ratio.
B. An investment project 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 a 70 percent leverage ratio.
E. An investment project that results in an 80 percent leverage ratio.
Q:
The definition of a highly leveraged transaction (HLT) loan as adopted by U.S. bank regulators in 1989 includes
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 above.
E. Only two of the above.
Q:
A buyer of a loan participation is exposed to
A. risk exposure to the original borrower defaulting.
B. risk exposure to the failure of the selling bank.
C. moral hazard problems because the borrower is no longer monitored by the seller.
D. Answers A and B only.
E. Answers A and C only.
Q:
Loan participations are typically sold to correspondent banks because
A. they are insiders and can be trusted.
B. they offer the best prices.
C. the ongoing relationship offers the greatest monitoring opportunities.
D. it is a regulatory requirement.
E. correspondent banks are captive customers.
Q:
In a loan participation
A. the holder (buyer) 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. the holder (buyer) 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. the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing the loan.
D. Answers A and C only.
E. Answers B and C only.
Q:
Loan participations
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.
Q:
Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.
A. Participations.
B. Originations.
C. Syndications.
D. Assignments.
E. Transfers.
Q:
What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?
A. Participations and assignments.
B. Participations and originations.
C. Syndications and originations.
D. Transfers and assignments.
E. Exercise and transfers.
Q:
Which of the following is NOT a key characteristic of loans sold in the short-term loan sale market?
A. Issued as a secured loan.
B. Loans to investment grade borrowers or better.
C. Issued with a fixed rate.
D. Sold in units of $1 million and up.
E. Issued for 90 days or less.
Q:
Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?
A. Window.
B. Financial distress.
C. Foreclosure.
D. Recession.
E. Assignment.
Q:
Which of the following observations is NOT correct?
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.
Q:
Which of the following is true concerning loans sold with recourse?
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.
Q:
Which of the following is NOT true of a loan that is sold without recourse?
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 the above.
Q:
Which of the following is NOT a reason for a FI to sell loans with recourse?
A. To reduce capital requirements.
B. To avoid credit risk exposure.
C. To control interest rate risk exposure.
D. To avoid regulatory scrutiny.
E. To make it possible to lend large amounts to an individual borrower.
Q:
A loan made to finance a merger and acquisition that usually results in a high leverage ratio for the borrower is a
A. loan sold without recourse.
B. highly leveraged transaction loan.
C. loan sold with recourse.
D. loan assignment transaction.
E. loan participation transaction.
Q:
Which of the following is NOT a contractual mechanism used by FIs to control credit risks?
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.
Q:
Besides reducing credit risks, an FI has an incentive to sell loans it originates for all of the following reasons EXCEPT to:
A. geographically diversify.
B. decrease core deposits.
C. lower reserve requirements.
D. lower capital requirements.
E. generate reinvestment income.
Q:
As FIs consolidate and expand their range of financial services, customer relationships with commercial entities are likely to become more important.
Q:
As of 2010, the Department of Housing and Urban Development (HUD) no longer sells loans that were used to purchase multifamily apartment properties.
Q:
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.
Q:
Although a loan sale strategy for an FI may reduce or eliminate credit risk, the strategy does not affect the FI's liquidity risk.
Q:
Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.
Q:
Most vulture funds are formed by the mutual fund industry as a way around SEC restrictions from participating in the FI-originated loan sales market.
Q:
Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.
Q:
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.
Q:
The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.
Q:
A loan credit rating is the same as bond credit rating in that it is based solely on the financial soundness of the underlying corporation.
Q:
Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.
Q:
One way to boost the capital to assets ratio of an FI is through loan sales.
Q:
Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.
Q:
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.
Q:
The primary sellers of domestic loans are medium-sized regional banks.
Q:
Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.
Q:
Credit derivatives allow FIs to reduce credit risks without removing loan assets from their balance sheet.
Q:
Insurance companies and pension funds are important buyers of long-maturity loans.