Question 1

The buyer of a participation loan must watch both the borrower and the seller bank closely.

Accepted Answer

As a participation loan involves both a borrower and a seller bank, the buyer of such a loan must monitor both parties to ensure that the loan is being serviced as per the terms and conditions of the contract. This includes monitoring the financial health and creditworthiness of the borrower and the performance of the seller bank in managing the loan. Failure to do so can result in potential losses for the buyer.

Question 2

FNMA (Fannie Mae)and FHLMC (Freddie Mac)are examples of ____________.They appear to have the unofficial backing of the federal government in the event of default.

Accepted Answer

The answer of FNMA (Fannie Mae)and FHLMC (Freddie Mac)are examples...

Question 3

Securitized assets,as a source of bank funds,are subject to reserve requirements set by the Federal Reserve Board.

Accepted Answer

Securitized assets are not a source of bank funds; instead, they are assets (like loans) that a bank sells to a third party to be packaged into securities. Reserve requirements set by the Federal Reserve Board apply to deposits, not to the proceeds from selling securitized assets.

Question 4

In securitization,a cash reserve which is created to give an impression to the buyers that the investment carries low risk is an example of ____________.

Accepted Answer

The answer of In securitization,a cash reserve which is created...

Question 5

Securitization has the added advantage of generating fee income for banks.

Accepted Answer

Securitization involves the packaging and sale of cash flows from assets, which generates fee income for banks through the creation and maintenance of the securitization structure.

Question 6

When the FHLMC creates CMOs,they often use different _________________ to issue the securities,which are characterized by the differences in coupon rate,maturity and risk profile.

Accepted Answer

The answer of When the FHLMC creates CMOs,they often use...

Question 7

A(n)__________________ rates the securities to be sold from a pool of securitized loans so that investors have a better idea of what the new securities are likely to be worth.

Accepted Answer

The answer of A(n)__________________ rates the securities to be sold...

Question 8

Securitization tends to lengthen the maturity of a bank's assets.

Accepted Answer

Securitization involves converting assets into marketable securities, which typically shortens the effective maturity of assets by allowing the bank to transfer the long-term asset risk to investors.

Question 9

A loan sold by a bank to another investor with recourse means the bank has given the investor a call option on the loan.

Accepted Answer

A loan sold with recourse means that the selling bank retains some liability if the borrower defaults, not that it has given the investor a call option on the loan.

Question 10

Under an assignment ownership,a loan is transferred to the buyer,though the buyer still holds only an indirect claim against the borrower.

Accepted Answer

Under an assignment of ownership, the buyer of the loan acquires a direct claim against the borrower, not an indirect one. This means the buyer steps into the shoes of the original lender and has the right to enforce the loan terms directly with the borrower.

Question 11

Lenders can set aside a group of loans on their balance sheet,issue bonds,and pledge the loans as collateral against the bonds in a type of securitization known as ___________.These usually stay on the bank's balance sheet as liabilities.

Accepted Answer

The answer of Lenders can set aside a group of...

Question 12

Servicing rights on loans sold consist of the collection of interest and principal payments from borrowers and monitoring borrower compliance with loan terms.

Accepted Answer

Servicing rights involve the ongoing administration and management of a loan. This includes collecting payments, monitoring compliance with loan terms, and communicating with borrowers.

Question 13

Securitizations of commercial loans usually carry the same regulatory capital requirements for a bank as the original loans themselves.

Accepted Answer

This is true. The securitization of a commercial loan does not change the underlying risk profile of the loan, so regulatory capital requirements remain the same for the bank.

Question 14

Most loans that banks sell off their balance sheets have minimum denominations of at least a million dollars.

Accepted Answer

This statement is generally true. Loans that banks sell off their balance sheets are often bundled into securities and sold to institutional investors, who typically purchase in large amounts. Therefore, minimum denominations are typically at least a million dollars to attract these investors. However, there may be exceptions in certain cases where smaller denominations can be sold.

Question 15

Securitization raises the level of competition for the best-quality loans among banks.

Accepted Answer

Securitization allows banks to pool loans and sell them to investors, thereby freeing up capital to make new loans. This increased liquidity and lower risk for the banks can lead to greater competition for the best-quality loans, as they can sell them off and use the proceeds to make more loans or invest in other profitable ventures.

Question 16

An account party will seek a standby credit guarantee if the bank's fee for issuing the guarantee is less than the value assigned to the guarantee by its beneficiary.

Accepted Answer

The account party will only seek a standby credit guarantee if the cost of obtaining the guarantee (i.e. the bank's fee) is less than the perceived value assigned to it by the beneficiary. This ensures that the account party is getting a good deal for the protection provided by the guarantee.

Question 17

Securitization is designed to turn illiquid loans into liquid assets in the form of securities sold in the open market.

Accepted Answer

Securitization involves pooling illiquid loans and creating securities backed by the cash flow from those loans. These securities can then be sold in the open market, making the underlying loans more liquid.

Question 18

Securitized assets cannot be removed from a bank's balance sheet until they mature.

Accepted Answer

Securitized assets can be sold to investors and removed from a bank's balance sheet, even before they mature. This is the whole purpose of securitization - to convert illiquid assets into tradable securities that can be sold to other investors, thereby freeing up capital for the bank to use for other purposes.

Question 19

In a participation loan,the purchaser is an outsider to the loan contract between the financial institution selling the loan and the borrower.

Accepted Answer

In a participation loan, the purchaser is an investor who buys a portion of the loan from the financial institution but is not a party to the original loan contract between the institution and the borrower.

Question 20

Most loans that banks sell off their balance sheets carry interest rates that usually are connected to long-term interest rates (such as the 30-year Treasury bond rate).

Accepted Answer

Most loans sold off by banks, such as mortgages, are often tied to short-term interest rates or adjustable rates rather than long-term rates like the 30-year Treasury bond rate.

Quiz 9: Risk Management: Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives