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)risk exposure to the original borrower defaulting and risk exposure to the failure of the selling bank.

Question

Quizplus · Accepted Answer

A buyer of a loan participation is exposed to the risk of the original borrower defaulting, as they are now responsible for a portion of the outstanding loan. Additionally, they also face the risk of the selling bank failing, which could potentially impact the value of the loan participation. Therefore, choice (D) is the most appropriate answer. Choice (A) only covers one of the two risks, while choice (B) is too narrow as it only considers one potential risk specific to the selling bank. Choice (C) is not directly related to the risks associated with buying a loan participation.

A Buyer of a Loan Participation Is Exposed to