Question 1

The Internet has allowed individual investors to purchase securities while benefiting from decreased transactions costs.

Accepted Answer

A) True 
 B)False  True

Question 2

Which of the following is NOT a major function of financial intermediaries?

Accepted Answer

A)  Brokerage services. 
B)  Asset transformation services. 
C)  Information production. 
D)  Management of the nation's money supply. 
E)  Administration of the payments mechanism. 
A)  Brokerage services. 
B)  Asset transformation services. 
C)  Information production. 
D)  Management of the nation's money supply. 
E)  Administration of the payments mechanism. D

Question 3

How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation?

Accepted Answer

A)  Financial intermediation has become riskier because it is more difficult to stay informed about worldwide events. 
B)  Financial intermediation has become more costly because it is necessary to invest in high cost technology. 
C)  Financial intermediation has been unaffected. 
D)  Financial intermediation has become more costly as global firms exploit economies of scale and scope. 
E)  Financial intermediation has become less risky as firms become adept at maintaining zero gap positions. 
A)  Financial intermediation has become riskier because it is more difficult to stay informed about worldwide events. 
B)  Financial intermediation has become more costly because it is necessary to invest in high cost technology. 
C)  Financial intermediation has been unaffected. 
D)  Financial intermediation has become more costly as global firms exploit economies of scale and scope. 
E)  Financial intermediation has become less risky as firms become adept at maintaining zero gap positions. B

Question 4

The qualified thrift lender test is used to determine whether an institution is classified as a Savings Institution (Thrift).

Accepted Answer

A) True 
 B)False

Question 5

The efficiency with which FIs provide payment services directly benefits the economy.

Accepted Answer

A) True 
 B)False

Question 6

In what year did housing prices begin to deteriorate leading to a jump in defaults in the subprime mortgage markets and the onset of the recent financial crisis?

Accepted Answer

A)  2001. 
B)  2003. 
C)  2006. 
D)  2008. 
E)  2010. 
A)  2001. 
B)  2003. 
C)  2006. 
D)  2008. 
E)  2010.

Question 7

The housing bubble that began building in 2001 was primarily the result of

Accepted Answer

A)  the availability of low-cost affordable homes. 
B)  low interest rates and increased liquidity provided by the Federal Reserve. 
C)  a change in income tax policy that favored home ownership. 
D)  increased demand for U.S. real estate by international investors. 
E)  lack of available residential rental property. 
A)  the availability of low-cost affordable homes. 
B)  low interest rates and increased liquidity provided by the Federal Reserve. 
C)  a change in income tax policy that favored home ownership. 
D)  increased demand for U.S. real estate by international investors. 
E)  lack of available residential rental property.

Question 8

Financial institutions act as intermediaries between suppliers and users of money.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is closely associated with credit allocation regulation?

Accepted Answer

A)  Support the FI's lending to socially important sectors. 
B)  Transmission of monetary policy from the Federal Reserve to the economy. 
C)  Ensure the safety and soundness of the FI. 
D)  Prevent discrimination in lending on the basis of age, race, sex, or income. 
E)  Protect investors against abuses. 
A)  Support the FI's lending to socially important sectors. 
B)  Transmission of monetary policy from the Federal Reserve to the economy. 
C)  Ensure the safety and soundness of the FI. 
D)  Prevent discrimination in lending on the basis of age, race, sex, or income. 
E)  Protect investors against abuses.

Question 10

As a delegated monitor, an FI's actions reduce agency costs.

Accepted Answer

A) True 
 B)False

Question 11

Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden.

Accepted Answer

A) True 
 B)False

Question 12

The purpose of guaranty funds in safety and soundness regulation is to protect claim-holders when an FI collapses or fails.

Accepted Answer

A) True 
 B)False

Question 13

The asset transformation function of FIs typically involves

Accepted Answer

A)  receipt of securities through electronic payments systems. 
B)  altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolio. 
C)  granting loans to transform funds deficit units into funds surplus units. 
D)  investing short-term funds in off-balance sheet activities. 
E)  transferring of funds from one generation to another. 
A)  receipt of securities through electronic payments systems. 
B)  altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolio. 
C)  granting loans to transform funds deficit units into funds surplus units. 
D)  investing short-term funds in off-balance sheet activities. 
E)  transferring of funds from one generation to another.

Question 14

If a household invests in corporate securities and does not supervise how the funds are invested or used by the corporation, the risk of not earning the desired return or not having the funds returned increase.

Accepted Answer

A) True 
 B)False

Question 15

Many households place funds with financial institutions because many FI accounts provide

Accepted Answer

A)  lower denominations than other securities. 
B)  flexible maturities verses other interest-earning securities. 
C)  better liquidity than directly negotiated debt contracts. 
D)  less price risk if interest rates change. 
E)  All of the options. 
A)  lower denominations than other securities. 
B)  flexible maturities verses other interest-earning securities. 
C)  better liquidity than directly negotiated debt contracts. 
D)  less price risk if interest rates change. 
E)  All of the options.

Question 16

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT

Accepted Answer

A)  encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure. 
B)  encouraging banks to limit lending to a single customer to no more than 10% of capital. 
C)  the provision of deposit insurance. 
D)  the periodic monitoring of banks. 
E)  encouraging banks to produce timely accounting statements and reports. 
A)  encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure. 
B)  encouraging banks to limit lending to a single customer to no more than 10% of capital. 
C)  the provision of deposit insurance. 
D)  the periodic monitoring of banks. 
E)  encouraging banks to produce timely accounting statements and reports.

Question 17

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

Accepted Answer

A) True 
 B)False

Question 18

Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following measures the difference between the private costs of regulations and the private benefits of those regulations for the producers of financial services?

Accepted Answer

A)  Capital adequacy. 
B)  Agency costs. 
C)  Net regulatory burden. 
D)  Charter value. 
E)  Liquidity risk. 
A)  Capital adequacy. 
B)  Agency costs. 
C)  Net regulatory burden. 
D)  Charter value. 
E)  Liquidity risk.

Question 20

By diversifying investments, an FI is able to more accurately predict the expected return on its asset portfolio.

Accepted Answer

A) True 
 B)False

Exam 1: Why Are Financial Institutions Special

The Internet has allowed individual investors to purchase securities while benefiting from decreased transactions costs.

Which of the following is NOT a major function of financial intermediaries?

How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation?

The qualified thrift lender test is used to determine whether an institution is classified as a Savings Institution (Thrift).

The efficiency with which FIs provide payment services directly benefits the economy.

In what year did housing prices begin to deteriorate leading to a jump in defaults in the subprime mortgage markets and the onset of the recent financial crisis?

The housing bubble that began building in 2001 was primarily the result of

Financial institutions act as intermediaries between suppliers and users of money.

Which of the following is closely associated with credit allocation regulation?

As a delegated monitor, an FI's actions reduce agency costs.

Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden.

The purpose of guaranty funds in safety and soundness regulation is to protect claim-holders when an FI collapses or fails.

The asset transformation function of FIs typically involves

If a household invests in corporate securities and does not supervise how the funds are invested or used by the corporation, the risk of not earning the desired return or not having the funds returned increase.

Many households place funds with financial institutions because many FI accounts provide

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system EXCEPT

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.

Which of the following measures the difference between the private costs of regulations and the private benefits of those regulations for the producers of financial services?

By diversifying investments, an FI is able to more accurately predict the expected return on its asset portfolio.

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters