Question 1

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 2

Depository financial institutions include all of the following EXCEPT

Accepted Answer

A) commercial banks. 
B) savings banks. 
C) investment banks. 
D) credit unions. 
E) all of the above are depository institutions. 
A) commercial banks. 
B) savings banks. 
C) investment banks. 
D) credit unions. 
E) all of the above are depository institutions.

Question 3

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 4

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 5

The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.

Accepted Answer

A) True 
 B)False

Question 6

Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

Accepted Answer

A) True 
 B)False

Question 7

Traditionally, regulation of FIs in the U.S. has been

Accepted Answer

A) minimal, as evidenced by the recent financial crisis. 
B) extensive, as a result of the importance of FI to the economy. 
C) minimal, because the free market is allowed to allocate financial resources. 
D) extensive, because banks have monopoly power. 
E) no different from regulation of nonfinancial firms. 
A) minimal, as evidenced by the recent financial crisis. 
B) extensive, as a result of the importance of FI to the economy. 
C) minimal, because the free market is allowed to allocate financial resources. 
D) extensive, because banks have monopoly power. 
E) no different from regulation of nonfinancial firms.

Question 8

Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking?

Accepted Answer

A) Financial Institutions Reform Recovery and Enforcement Act (1989). 
B) Financial Services Modernization Act (1999). 
C) Competitive Equality in Banking Act (1987). 
D) The Bank Holding Company Act (1956). 
E) Garn-St.Germain Depository Institutions Act (1982). 
A) Financial Institutions Reform Recovery and Enforcement Act (1989). 
B) Financial Services Modernization Act (1999). 
C) Competitive Equality in Banking Act (1987). 
D) The Bank Holding Company Act (1956). 
E) Garn-St.Germain Depository Institutions Act (1982).

Question 9

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 10

Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds?

Accepted Answer

A) Liquidity risk. 
B) Price risk. 
C) Credit risk. 
D) Intermediation. 
E) Agency costs. 
A) Liquidity risk. 
B) Price risk. 
C) Credit risk. 
D) Intermediation. 
E) Agency costs.

Question 11

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 12

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 13

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade,

Accepted Answer

A) banks became more financially stable. 
B) it became easier to measure the riskiness of individual loans. 
C) there was a dramatic increase in systematic risk of the financial system. 
D) the Federal Reserve decreased the number of services that banks could provide. 
E) it became more difficult for households to obtain credit. 
A) banks became more financially stable. 
B) it became easier to measure the riskiness of individual loans. 
C) there was a dramatic increase in systematic risk of the financial system. 
D) the Federal Reserve decreased the number of services that banks could provide. 
E) it became more difficult for households to obtain credit.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Because of changes in regulatory barriers, technology, and financial innovation, a single financial service firm may now be able to offer a full set of financial services.

Accepted Answer

A) True 
 B)False

Question 16

The qualified thrift lender test is utilized to determine whether an institution can serve as an FI.

Accepted Answer

A) True 
 B)False

Question 17

Why do households prefer to use FIs as intermediaries to invest their surplus funds?

Accepted Answer

A) Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information. 
B) To receive the benefits of diversification that households may not be able to achieve on their own. 
C) The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs. 
D) The FI can provide insurance at relatively low cost that will protect funds under management. 
E) All of the above. 
A) Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information. 
B) To receive the benefits of diversification that households may not be able to achieve on their own. 
C) The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs. 
D) The FI can provide insurance at relatively low cost that will protect funds under management. 
E) All of the above.

Question 18

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 19

Investment companies are successful in attracting business away from banks and insurance companies primarily because they

Accepted Answer

A) guarantee higher rates of return on savers' funds. 
B) remove interest rate risk for the saver. 
C) have no liquidity risk. 
D) give savers cheaper access to the direct securities markets. 
E) offer lower loan rates. 
A) guarantee higher rates of return on savers' funds. 
B) remove interest rate risk for the saver. 
C) have no liquidity risk. 
D) give savers cheaper access to the direct securities markets. 
E) offer lower loan rates.

Question 20

Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

Accepted Answer

A) True 
 B)False

Exam 1: Why Are Financial Institutions Special

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

Depository financial institutions include all of the following EXCEPT

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

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 Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.

Commercial banks and finance companies have traditionally served the needs of the residential real estate market.

Traditionally, regulation of FIs in the U.S. has been

Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance, and investment banking?

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

Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds?

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

Which of the following is true of secondary securities?

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model over the last decade,

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

Because of changes in regulatory barriers, technology, and financial innovation, a single financial service firm may now be able to offer a full set of financial services.

The qualified thrift lender test is utilized to determine whether an institution can serve as an FI.

Why do households prefer to use FIs as intermediaries to invest their surplus funds?

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.

Investment companies are successful in attracting business away from banks and insurance companies primarily because they

Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

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