Question 1

Depository institutions include

Accepted Answer

A) banks. 
B) thrifts. 
C) finance companies. 
D) all of the options presented. 
E) banks and thrifts. 
A) banks. 
B) thrifts. 
C) finance companies. 
D) all of the options presented. 
E) banks and thrifts. E

Question 2

Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period.

Accepted Answer

A) True 
 B)False  False

Question 3

Households are increasingly likely to both directly purchase securities (perhaps via a broker)and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security.
I. Money likely to be needed within six months
II. Money to be set aside for college in 10 years
III. Money to provide supplemental retirement income
IV. Money to be used to provide for children in the event of death
1) Depository institutions
2) Insurer
3) Pension fund
4) Stocks or bonds

Accepted Answer

A) 2,3,4,1 
B) 1,4,2,3 
C) 3,2,1,4 
D) 1,4,3,2 
E) 4,2,1,3 
A) 2,3,4,1 
B) 1,4,2,3 
C) 3,2,1,4 
D) 1,4,3,2 
E) 4,2,1,3 D

Question 4

Money markets are the markets for securities with an original maturity of one year or less.

Accepted Answer

A) True 
 B)False

Question 5

What determines the price of financial instruments?
 Which are riskier,capital market instruments or money market instruments?
 Why?

Accepted Answer

The price of any financial instrument is

Question 6

How can using indirect finance rather than direct finance reduce agency costs associated with monitoring funds' demanders?

Accepted Answer

A large FI has a greater incentive to mo

Question 7

Which of the following is/are money market instrument(s)?

Accepted Answer

A) Negotiable CDs 
B) Common stock 
C) T-bonds 
D) 4-year maturity corporate bond 
E) Negotiable CDs,common stock,and T-bonds 
A) Negotiable CDs 
B) Common stock 
C) T-bonds 
D) 4-year maturity corporate bond 
E) Negotiable CDs,common stock,and T-bonds

Question 8

Financial intermediaries such as banks typically have assets that are riskier than their liabilities.

Accepted Answer

A) True 
 B)False

Question 9

Discuss the benefits to funds' suppliers of using a financial intermediary asset transformer in place of directly purchasing claims such as stocks or bonds. What is the major disadvantage?

Accepted Answer

Potential benefits to funds suppliers (S

Question 10

Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?

Accepted Answer

Major benefits include:
* Money supply t

Question 11

What factors are encouraging financial institutions to offer overlapping financial services such as banking,investment banking,brokerage,etc.?
I. Regulatory changes allowing institutions to offer more services
II. Technological improvements reducing the cost of providing financial services
III. Increasing competition from full-service global financial institutions
IV. Reduction in the need to manage risk at financial institutions

Accepted Answer

A) I only 
B) II and III only 
C) I,II,and III only 
D) I,II,and IV only 
E) I,II,III,and IV 
A) I only 
B) II and III only 
C) I,II,and III only 
D) I,II,and IV only 
E) I,II,III,and IV

Question 12

A negotiable CD is

Accepted Answer

A) a time draft payable to a seller of goods,with payment guaranteed by a bank. 
B) a loan to an individual or business to purchase a home,land,or other real property. 
C) a short-term fund transferred between financial institutions usually for no more than one day. 
D) a marketable bank issued time deposit that specifies the interest rate earned and a fixed maturity date. 
E) a short-term unsecured promissory note issued by a company to raise funds for a short time period. 
A) a time draft payable to a seller of goods,with payment guaranteed by a bank. 
B) a loan to an individual or business to purchase a home,land,or other real property. 
C) a short-term fund transferred between financial institutions usually for no more than one day. 
D) a marketable bank issued time deposit that specifies the interest rate earned and a fixed maturity date. 
E) a short-term unsecured promissory note issued by a company to raise funds for a short time period.

Question 13

There are three types of major financial markets today:
 primary,secondary,and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

Accepted Answer

A) True 
 B)False

Question 14

Explain how the credit crunch originating in the mortgage markets hurt financial intermediaries' attempts to use diversification and monitoring to limit the riskiness of their loans and investments while offering more liquid claims to savers.

Accepted Answer

Financial intermediaries' (FIs)attempts

Question 15

How can a depository intermediary afford to purchase long-term risky direct claims from funds demanders and finance these purchases with safe,liquid,short-term,low-denomination deposits?
 What can go wrong in this process?

Accepted Answer

DIs can afford to do so because the rate

Question 16

The most diversified type of depository institutions is

Accepted Answer

A) credit unions. 
B) savings associations. 
C) commercial banks. 
D) finance companies. 
E) mutual funds. 
A) credit unions. 
B) savings associations. 
C) commercial banks. 
D) finance companies. 
E) mutual funds.

Question 17

Discuss how secondary markets benefit funds issuers.

Accepted Answer

The secondary markets provide liquidity

Question 18

Match the intermediary with the characteristic that best describes its function.
I. Provide protection from adverse events.
II. Pool funds of small savers and invest in either money or capital markets.
III. Provide consumer loans and real estate loans funded by deposits.
IV. Accumulate and transfer wealth from work period to retirement period.
V. Underwrite and trade securities and provide brokerage services.
1) Thrifts
2) Insurers
3) Pension funds
4) Securities firms and investment banks
5) Mutual funds

Accepted Answer

A) 1,3,2,5,4 
B) 4,2,3,5,1 
C) 2,5,1,3,4 
D) 2,4,5,3,1 
E) 5,1,3,2,4 
A) 1,3,2,5,4 
B) 4,2,3,5,1 
C) 2,5,1,3,4 
D) 2,4,5,3,1 
E) 5,1,3,2,4

Question 19

Liquidity risk at a financial intermediary (FI)is the risk

Accepted Answer

A) that promised cash flows from loans and securities held by FIs may not be paid in full. 
B) incurred by an FI when the maturities of its assets and liabilities do not match. 
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. 
D) incurred by an FI when its investments in technology do not result in cost savings or revenue growth. 
E) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. 
A) that promised cash flows from loans and securities held by FIs may not be paid in full. 
B) incurred by an FI when the maturities of its assets and liabilities do not match. 
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. 
D) incurred by an FI when its investments in technology do not result in cost savings or revenue growth. 
E) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

Question 20

Financial intermediaries (FIs)can offer savers a safer,more liquid investment than a capital market security,even though the intermediary invests in risky illiquid instruments because

Accepted Answer

A) FIs can diversify away some of their risk. 
B) FIs closely monitor the riskiness of their assets. 
C) the federal government requires them to do so. 
D) FIs can diversify away some of their risk and closely monitor the riskiness of their assets. 
E) FIs can diversify away some of their risk and the federal government requires them to do so. 
A) FIs can diversify away some of their risk. 
B) FIs closely monitor the riskiness of their assets. 
C) the federal government requires them to do so. 
D) FIs can diversify away some of their risk and closely monitor the riskiness of their assets. 
E) FIs can diversify away some of their risk and the federal government requires them to do so.

Exam 1: Introduction

Depository institutions include

Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period.

Money markets are the markets for securities with an original maturity of one year or less.

What determines the price of financial instruments? Which are riskier,capital market instruments or money market instruments? Why?

How can using indirect finance rather than direct finance reduce agency costs associated with monitoring funds' demanders?

Which of the following is/are money market instrument(s)?

Financial intermediaries such as banks typically have assets that are riskier than their liabilities.

Discuss the benefits to funds' suppliers of using a financial intermediary asset transformer in place of directly purchasing claims such as stocks or bonds. What is the major disadvantage?

Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?

A negotiable CD is

There are three types of major financial markets today: primary,secondary,and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

Explain how the credit crunch originating in the mortgage markets hurt financial intermediaries' attempts to use diversification and monitoring to limit the riskiness of their loans and investments while offering more liquid claims to savers.

How can a depository intermediary afford to purchase long-term risky direct claims from funds demanders and finance these purchases with safe,liquid,short-term,low-denomination deposits? What can go wrong in this process?

The most diversified type of depository institutions is

Discuss how secondary markets benefit funds issuers.

Liquidity risk at a financial intermediary (FI)is the risk

Financial intermediaries (FIs)can offer savers a safer,more liquid investment than a capital market security,even though the intermediary invests in risky illiquid instruments because

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

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