Question 1

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 2

As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.

Accepted Answer

A) True 
 B)False

Question 3

Financial institutions are subject to economies of scale in the collection of information.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Currently (2012) J.P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.

Accepted Answer

A) True 
 B)False

Question 6

The origination of a home mortgage loan is considered to be a

Accepted Answer

A) primary security, because this is the FI's primary source of business. 
B) secondary security, because mortgages are typically resold in the secondary market. 
C) primary security, because the mortgage note is a newly created security. 
D) secondary security if the sale is for an existing home and a primary security if it is for a new home. 
E) derivative security because the value of the mortgage note depends on the underlying value of the home. 
A) primary security, because this is the FI's primary source of business. 
B) secondary security, because mortgages are typically resold in the secondary market. 
C) primary security, because the mortgage note is a newly created security. 
D) secondary security if the sale is for an existing home and a primary security if it is for a new home. 
E) derivative security because the value of the mortgage note depends on the underlying value of the home.

Question 7

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.

Question 8

The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.

Accepted Answer

A) True 
 B)False

Question 9

Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as stocks and bonds.

Accepted Answer

A) True 
 B)False

Question 10

The federal government has traditionally extended safety nets to DIs consisting of

Accepted Answer

A) deposit insurance, discount window borrowing, and reserve requirements. 
B) deposit insurance and discount window borrowing. 
C) deposit insurance, unemployment insurance, and discount window borrowing. 
D) deposit insurance, open market operations, and discount window borrowing. 
E) deposit insurance protection. 
A) deposit insurance, discount window borrowing, and reserve requirements. 
B) deposit insurance and discount window borrowing. 
C) deposit insurance, unemployment insurance, and discount window borrowing. 
D) deposit insurance, open market operations, and discount window borrowing. 
E) deposit insurance protection.

Question 11

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 12

The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.

Accepted Answer

A) True 
 B)False

Question 13

The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

Economic collapse during the 1930s, the banking system in the U.S. performed directly or indirectly all financial services. Those functions included all of the following EXCEPT

Accepted Answer

A) commercial banking. 
B) money market funds. 
C) investment banking. 
D) stock investing. 
E) insurance services. 
A) commercial banking. 
B) money market funds. 
C) investment banking. 
D) stock investing. 
E) insurance services.

Question 17

Verifying the minimum level of capital or equity that must be held to fund the operations of an FI is part of the goal of

Accepted Answer

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

Exam 1: Why Are Financial Institutions Special

The asset transformation function of FIs typically involves

As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.

Financial institutions are subject to economies of scale in the collection of information.

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

Currently (2012) J.P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.

The origination of a home mortgage loan is considered to be a

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

The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.

Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as stocks and bonds.

The federal government has traditionally extended safety nets to DIs consisting of

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

The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.

The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.

What distinguishes financial intermediaries from industrial firms?

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?

Economic collapse during the 1930s, the banking system in the U.S. performed directly or indirectly all financial services. Those functions included all of the following EXCEPT

Verifying the minimum level of capital or equity that must be held to fund the operations of an FI is part of the goal of

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