Question 1

What distinguishes financial intermediaries from industrial firms?

Accepted Answer

A)  FI balance sheets are almost totally comprised of financial assets while commercial firms hold substantial amounts of real assets. 
B)  Industrial firms are the customers of FIs, but FIs cannot be customers of industrial firms. 
C)  FIs deal exclusively in primary securities, but industrial firms specialize in secondary securities. 
D)  Industrial firms produce real goods or services while FIs only produce money. 
E)  Industrial firms are unregulated while FIs are heavily regulated. 
A)  FI balance sheets are almost totally comprised of financial assets while commercial firms hold substantial amounts of real assets. 
B)  Industrial firms are the customers of FIs, but FIs cannot be customers of industrial firms. 
C)  FIs deal exclusively in primary securities, but industrial firms specialize in secondary securities. 
D)  Industrial firms produce real goods or services while FIs only produce money. 
E)  Industrial firms are unregulated while FIs are heavily regulated.

Question 2

Adopting an enterprise risk management approach by an FI is likely to result in all of the following EXCEPT

Accepted Answer

A)  prioritizing each risk and managing them as a portfolio of risks. 
B)  recognizing that risk-taking is rooted in subtle behavioral characteristics. 
C)  larger investments in risk management processes and systems. 
D)  encouraging a culture of risk awareness and decisions throughout the organization. 
E)  realignment of the stature and resources provided to risk management functions within the FI. 
A)  prioritizing each risk and managing them as a portfolio of risks. 
B)  recognizing that risk-taking is rooted in subtle behavioral characteristics. 
C)  larger investments in risk management processes and systems. 
D)  encouraging a culture of risk awareness and decisions throughout the organization. 
E)  realignment of the stature and resources provided to risk management functions within the FI.

Question 3

Price and quantity restrictions in regulation are usually aimed at determining whether an FI is meeting certain

Accepted Answer

A)  consumer protection guidelines. 
B)  credit allocation guidelines. 
C)  investor protection guidelines. 
D)  safety and soundness guidelines. 
E)  entry regulation guidelines. 
A)  consumer protection guidelines. 
B)  credit allocation guidelines. 
C)  investor protection guidelines. 
D)  safety and soundness guidelines. 
E)  entry regulation guidelines.

Question 4

The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to provide incentives to comply with

Accepted Answer

A)  entry regulation. 
B)  credit allocation regulation. 
C)  consumer protection regulation. 
D)  safety and soundness regulation. 
E)  investor protection regulation. 
A)  entry regulation. 
B)  credit allocation regulation. 
C)  consumer protection regulation. 
D)  safety and soundness regulation. 
E)  investor protection regulation.

Question 5

Net regulatory burden for FIs is higher because regulators may require the FI to

Accepted Answer

A)  hold more capital than what would be held without regulation. 
B)  produce less information than would be produced without regulation. 
C)  hold more debt than what would be held without regulation. 
D)  hold fewer reserves than they would without regulation. 
E)  All of the options. 
A)  hold more capital than what would be held without regulation. 
B)  produce less information than would be produced without regulation. 
C)  hold more debt than what would be held without regulation. 
D)  hold fewer reserves than they would without regulation. 
E)  All of the options.

Question 6

The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.

Accepted Answer

A) True 
 B)False

Question 7

Secondary securities are securities that serve as collateral for primary securities.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is true of secondary securities?

Accepted Answer

A)  They include equities, bonds, and other debt claims. 
B)  They are backed by the real assets of corporations issuing them. 
C)  They are securities that back primary securities. 
D)  They are securities issued by FIs. 
E)  They must be placed in a separate account on order for primary securities to be offered. 
A)  They include equities, bonds, and other debt claims. 
B)  They are backed by the real assets of corporations issuing them. 
C)  They are securities that back primary securities. 
D)  They are securities issued by FIs. 
E)  They must be placed in a separate account on order for primary securities to be offered.

Question 9

Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.

Accepted Answer

A) True 
 B)False

Question 10

In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by U.S. households.

Accepted Answer

A) True 
 B)False

Question 11

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

Accepted Answer

A) True 
 B)False

Question 12

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in

Accepted Answer

A)  increased operating costs. 
B)  increased interest rate risk. 
C)  increased liquidity risk. 
D)  decreased monitoring costs. 
E)  decreased fee income. 
A)  increased operating costs. 
B)  increased interest rate risk. 
C)  increased liquidity risk. 
D)  decreased monitoring costs. 
E)  decreased fee income.

Question 13

An FI is exposed to liquidity risk because the average maturity of assets and the average maturity of liabilities are often different on the FIs balance sheet.

Accepted Answer

A) True 
 B)False

Question 14

The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation.

Accepted Answer

A) True 
 B)False

Question 15

Financial intermediaries are

Accepted Answer

A)  funds surplus units, because they exist to make money. 
B)  funds deficit units, because they must pay heavy regulatory fees and taxes. 
C)  funds surplus units, because they hold large portfolios of financial securities. 
D)  funds deficit units, because they must comply with minimum capital requirements. 
E)  neither funds surplus nor deficit units. 
A)  funds surplus units, because they exist to make money. 
B)  funds deficit units, because they must pay heavy regulatory fees and taxes. 
C)  funds surplus units, because they hold large portfolios of financial securities. 
D)  funds deficit units, because they must comply with minimum capital requirements. 
E)  neither funds surplus nor deficit units.

Question 16

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is

Accepted Answer

A)  because diversification allows an FI to predict more accurately the expected returns on its asset portfolio. 
B)  significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive. 
C)  because individual savers cannot benefit from risk diversification. 
D)  because FIs have a cost advantage in monitoring their portfolios. 
E)  All of the options. 
A)  because diversification allows an FI to predict more accurately the expected returns on its asset portfolio. 
B)  significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive. 
C)  because individual savers cannot benefit from risk diversification. 
D)  because FIs have a cost advantage in monitoring their portfolios. 
E)  All of the options.

Question 17

The part of the money supply produced by depository institutions is referred to outside money because it is produced outside of the government.

Accepted Answer

A) True 
 B)False

Question 18

As a result of adopting an enterprise risk management approach, an FI will invest heavily in advanced risk measurement and management systems and practices.

Accepted Answer

A) True 
 B)False

Question 19

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT

Accepted Answer

A)  monitoring done by the bank on your behalf. 
B)  increased liquidity if funds are needed quickly. 
C)  increased transactions costs. 
D)  less price risk when funds are needed. 
E)  better diversification of deposited funds. 
A)  monitoring done by the bank on your behalf. 
B)  increased liquidity if funds are needed quickly. 
C)  increased transactions costs. 
D)  less price risk when funds are needed. 
E)  better diversification of deposited funds.

Question 20

The recent financial crisis highlighted, in retrospect, how heavily households and businesses had come to rely on FIs to act as specialists in

Accepted Answer

A)  generating profits and lowering costs. 
B)  risk measurement and management. 
C)  investment advice and brokerage services. 
D)  time intermediation and denomination mediation. 
E)  derivative securities and interbank borrowing. 
A)  generating profits and lowering costs. 
B)  risk measurement and management. 
C)  investment advice and brokerage services. 
D)  time intermediation and denomination mediation. 
E)  derivative securities and interbank borrowing.

Exam 1: Why Are Financial Institutions Special

What distinguishes financial intermediaries from industrial firms?

Adopting an enterprise risk management approach by an FI is likely to result in all of the following EXCEPT

Price and quantity restrictions in regulation are usually aimed at determining whether an FI is meeting certain

The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to provide incentives to comply with

Net regulatory burden for FIs is higher because regulators may require the FI to

The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.

Secondary securities are securities that serve as collateral for primary securities.

Which of the following is true of secondary securities?

Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.

In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by U.S. households.

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in

An FI is exposed to liquidity risk because the average maturity of assets and the average maturity of liabilities are often different on the FIs balance sheet.

The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation.

Financial intermediaries are

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively illiquid and higher risk assets is

The part of the money supply produced by depository institutions is referred to outside money because it is produced outside of the government.

As a result of adopting an enterprise risk management approach, an FI will invest heavily in advanced risk measurement and management systems and practices.

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT

The recent financial crisis highlighted, in retrospect, how heavily households and businesses had come to rely on FIs to act as specialists in

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