Question 1

A loan participation is&#10;A)a multilender financing arrangement in which there are lead and participant lenders.&#10;B)a loan in which the sale of the loan to participants occurs after the loan documentation has been executed by the lead and the borrower.&#10;C)a loan in which the borrower and the lender participate actively in the running of the borrower's business financed with the loan.

Accepted Answer

Loan participations are arrangements where multiple lenders are involved, typically with lead and participant lenders. The sale of parts of the loan to participants often occurs after the loan documentation has been executed by the lead lender and the borrower, allowing for the distribution of risk among the participating lenders. Participation does not involve lenders in the active running of the borrower's business, which distinguishes it from other forms of financial involvement.

Question 2

A loan sale is&#10;A)just another name for loan syndication.&#10;B)a sale of a part of a loan by the originating bank to other financial institutions in the market.&#10;C)an open-market transaction in which the bank that made the loan trades it in manner analogous to trading by investors who own stocks.

Accepted Answer

A loan sale refers to the sale of a part of a loan by the originating bank to other financial institutions in the market. It is different from loan syndication, which involves multiple banks working together to provide a loan to a borrower. It is also different from trading in the open market, as loan sales are typically negotiated directly between the buyer and the seller.

Question 3

An arrangement fee in a syndicated loan is a fee that is&#10;A)charged up front to the borrower.&#10;B)paid only if the loan facility is not used.&#10;C)a penalty for prepaying the loan.

Accepted Answer

An arrangement fee in a syndicated loan is typically charged up front to the borrower. It is a fee that compensates the lead arranger(s) for underwriting and arranging the loan, as well as coordinating with the other lenders in the syndicate.

Question 4

Project financing is used because&#10;A)it more effectively resolves asymmetric information problems.&#10;B)it more effectively resolves asset-substitution moral hazard problems.&#10;C)it permits a greater use of debt financing.&#10;D)all of the above.

Accepted Answer

Project financing offers a solution to different issues: asymmetric information problems, asset-substitution moral hazard, and it provides an opportunity for more significant debt financing since the project itself serves as collateral for the loans. Therefore, all of the options are correct.

Question 5

Syndicated loans help banks to&#10;A)serve crime mob syndicates.&#10;B)diversify their credit risk exposure and resolve a tension between the benefits of diversification and specialization.&#10;C)make very high profits.

Accepted Answer

Syndicated loans allow banks to spread out the risk of a large loan across multiple lenders, allowing for more diversified credit risk exposure. This helps banks to balance the benefits of diversification with their specialization in lending. Serving crime mob syndicates is illegal and not a purpose of syndicated loans. While banks can make profits from syndicated loans, it is not necessarily their primary goal.

Question 6

Project financing is&#10;A)a technique for financing the working capital needed for a project.&#10;B)a technique for misrepresenting the true debt of the enterprise to investors.&#10;C)a technique for financing large-scale infrastructure projects.

Accepted Answer

Project financing is a technique for financing large-scale infrastructure projects, such as power plants or highways. It involves creating a separate legal entity for the project, which can then obtain financing based solely on the projected cash flows of the project. This minimizes the risk for the lenders, as the debt is tied to the success or failure of the project, rather than the overall financial health of the sponsoring company. The assets of the project are also often used as collateral for the financing.

Question 7

A syndicated loan is&#10;A)a loan to a syndicate of firms.&#10;B)a loan to a crime mob syndicate.&#10;C)credit granted by a group of lenders to a single borrower.

Accepted Answer

A syndicated loan is a credit provided by a group of lenders, usually led by a bank, to a single borrower. The loan is typically large in size and is divided among the lenders, with each lender contributing a portion of the loan amount. This allows the borrower to access funds beyond the limit of a single lender and provides the lenders with the opportunity to diversify their loan portfolios.

Deck 9: Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance