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When banks calculate the losses the institution would incur if an unusual combination of bad
events happened, the bank is using the ____ approach.
A) stress-test
B) value-at-risk
C) trading-loss
D) maximum value
Answer: A
Diff: 3 Type: MC Page Ref: 318
Skill: Recall
Objective List: 13.5 Illustrate how off-balance-sheet activities affect bank profits
What is a loan sale and how does it work?
Answer: The students must explain that the loan sale is an off-balance-sheet activity that has
grown in importance in recent years and it generates income for banks. A loan sale is also called
a secondary loan participation and involves a contract that sells all or part of the cash stream
from a specific loan and thereby it removes it from the bank's balance sheet. Banks earn profit by
selling the loans for an amount slightly higher than the original loan amount. The high interest
rate for these loans makes them attractive and institutions are willing to buy them at the higher
price which means that they earn a slightly lower interest rate than the original loan usually on
the order of 0.15 percentage points.
Diff: 3 Type: SA Page Ref: 317
Skill: Recall
Objective List: 13.5 Illustrate how off-balance-sheet activities affect bank profits