Question 1

Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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  False

Question 4

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?

Accepted Answer

A) The bank failure usually leads to a government bailout. 
B) There are fewer steel manufacturers than there are banks. 
C) The large bank failure reduces credit availability throughout the economy. 
D) Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets. 
E) Everyone needs money, but not everyone needs steel. 
A) The bank failure usually leads to a government bailout. 
B) There are fewer steel manufacturers than there are banks. 
C) The large bank failure reduces credit availability throughout the economy. 
D) Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets. 
E) Everyone needs money, but not everyone needs steel.

Question 5

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Accepted Answer

A) True 
 B)False

Question 6

Nondepository financial institutions are represented by all of the following EXCEPT

Accepted Answer

A) insurance companies. 
B) mutual funds. 
C) finance companies. 
D) credit unions. 
E) securities firms. 
A) insurance companies. 
B) mutual funds. 
C) finance companies. 
D) credit unions. 
E) securities firms.

Question 7

The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

Accepted Answer

A) True 
 B)False

Question 8

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.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

Accepted Answer

A) True 
 B)False

Question 11

Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs.

Accepted Answer

A) True 
 B)False

Question 12

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 above. 
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 above.

Question 13

Which of the following observations is true?

Accepted Answer

A) Central bank directly controls both inside and outside money. 
B) Outside money is that part of the money supply produced by the private banking system. 
C) Inside money refers to the quantity of notes and coin in the economy. 
D) Bulk of the money supply consists of inside money. 
E) Central banks cannot vary the quantity of outside money. 
A) Central bank directly controls both inside and outside money. 
B) Outside money is that part of the money supply produced by the private banking system. 
C) Inside money refers to the quantity of notes and coin in the economy. 
D) Bulk of the money supply consists of inside money. 
E) Central banks cannot vary the quantity of outside money.

Question 14

In a world without FIs, households will be less willing to invest in corporate securities because they

Accepted Answer

A) are not able to monitor the activities of the corporation more closely than FIs. 
B) tend to prefer shorter, more liquid securities. 
C) are subject to price risk when corporate securities are sold. 
D) may not have enough funds to purchase corporate securities. 
E) All of the above. 
A) are not able to monitor the activities of the corporation more closely than FIs. 
B) tend to prefer shorter, more liquid securities. 
C) are subject to price risk when corporate securities are sold. 
D) may not have enough funds to purchase corporate securities. 
E) All of the above.

Question 15

Which of the following groups of FIs have experienced the highest percentage growth in assets in the U.S. financial services industry during the past sixty years?

Accepted Answer

A) Commercial banks. 
B) Thrifts. 
C) Life insurance companies. 
D) Investment companies. 
E) Finance companies. 
A) Commercial banks. 
B) Thrifts. 
C) Life insurance companies. 
D) Investment companies. 
E) Finance companies.

Question 16

One reason for the increasing proportion of total financial assets controlled by pension funds and investment companies is that these intermediaries exploit the comparative advantages of size and diversification.

Accepted Answer

A) True 
 B)False

Question 17

Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?

Accepted Answer

A) Brokerage services. 
B) Asset transformation services. 
C) Information production services. 
D) Money supply management. 
E) Administration of the payments mechanism. 
A) Brokerage services. 
B) Asset transformation services. 
C) Information production services. 
D) Money supply management. 
E) Administration of the payments mechanism.

Question 18

FIs are independent market entities that create financial assets whose value is the transformation of financial risk.

Accepted Answer

A) True 
 B)False

Question 19

The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 1: Why Are Financial Institutions Special

Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.

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

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

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Nondepository financial institutions are represented by all of the following EXCEPT

The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

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

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

Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.

Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs.

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

Which of the following observations is true?

In a world without FIs, households will be less willing to invest in corporate securities because they

Which of the following groups of FIs have experienced the highest percentage growth in assets in the U.S. financial services industry during the past sixty years?

One reason for the increasing proportion of total financial assets controlled by pension funds and investment companies is that these intermediaries exploit the comparative advantages of size and diversification.

Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?

FIs are independent market entities that create financial assets whose value is the transformation of financial risk.

The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.

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?

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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