Question 1

The Volcker Rule prohibits U.S. depository institutions from engaging in proprietary trading.

Accepted Answer

A) True 
 B)False  True

Question 2

Insolvency risk at a financial intermediary (FI)is the risk

Accepted Answer

A) that promised cash flows from loans and securities held by FIs may not be paid in full. 
B) incurred by an FI when the maturities of its assets and liabilities do not match. 
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. 
D) incurred by an FI when its investments in technology do not result in cost savings or revenue growth. 
E) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. 
A) that promised cash flows from loans and securities held by FIs may not be paid in full. 
B) incurred by an FI when the maturities of its assets and liabilities do not match. 
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. 
D) incurred by an FI when its investments in technology do not result in cost savings or revenue growth. 
E) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. E

Question 3

There are three types of major financial markets today: primary,secondary,and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

Accepted Answer

A) True 
 B)False  False

Question 4

How can using indirect finance rather than direct finance reduce agency costs associated with monitoring funds demanders?

Accepted Answer

A large FI has a greater incentive to mo

Question 5

What determines the price of financial instruments? Which are riskier,capital market instruments or money market instruments? Why?

Accepted Answer

The price of any financial instrument is

Question 6

How can a depository intermediary afford to purchase long-term risky direct claims from funds demanders and finance these purchases with safe,liquid,short-term,low-denomination deposits? What can go wrong in this process?

Accepted Answer

DIs can afford to do so because the rate

Question 7

Depository institutions (DIs)play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy because

Accepted Answer

A) loans to corporations are part of the money supply. 
B) bank and thrift loans are tightly regulated. 
C) U.S. DIs compete with foreign financial institutions. 
D) DI deposits are a major portion of the money supply. 
E) thrifts provide a large amount of credit to finance residential real estate. 
A) loans to corporations are part of the money supply. 
B) bank and thrift loans are tightly regulated. 
C) U.S. DIs compete with foreign financial institutions. 
D) DI deposits are a major portion of the money supply. 
E) thrifts provide a large amount of credit to finance residential real estate.

Question 8

Primary markets are markets in which users of funds raise cash by selling securities to funds suppliers.

Accepted Answer

A) True 
 B)False

Question 9

Financial intermediaries (FIs)can offer savers a safer,more liquid investment than a capital market security,even though the intermediary invests in risky illiquid instruments because

Accepted Answer

A) FIs can diversify away some of their risk. 
B) FIs closely monitor the riskiness of their assets. 
C) the federal government requires them to do so. 
D) FIs can diversify away some of their risk and closely monitor the riskiness of their assets. 
E) FIs can diversify away some of their risk and the federal government requires them to do so. 
A) FIs can diversify away some of their risk. 
B) FIs closely monitor the riskiness of their assets. 
C) the federal government requires them to do so. 
D) FIs can diversify away some of their risk and closely monitor the riskiness of their assets. 
E) FIs can diversify away some of their risk and the federal government requires them to do so.

Question 10

Corporate security issuers are always directly involved in funds transfers in the secondary market.

Accepted Answer

A) True 
 B)False

Question 11

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds.
Morgan Stanley is acting as a(n)

Accepted Answer

A) asset transformer. 
B) asset broker. 
C) government regulator. 
D) foreign service representative. 
E) derivatives trader. 
A) asset transformer. 
B) asset broker. 
C) government regulator. 
D) foreign service representative. 
E) derivatives trader.

Question 12

Households are increasingly likely to both directly purchase securities (perhaps via a broker)and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security.
I. Money likely to be needed within six months
II. Money to be set aside for college in 10 years
III. Money to provide supplemental retirement income
IV. Money to be used to provide for children in the event of death
1. Depository institutions
2. Insurer
3. Pension fund
4. Stocks or bonds

Accepted Answer

A) 2,3,4,1 
B) 1,4,2,3 
C) 3,2,1,4 
D) 1,4,3,2 
E) 4,2,1,3 
A) 2,3,4,1 
B) 1,4,2,3 
C) 3,2,1,4 
D) 1,4,3,2 
E) 4,2,1,3

Question 13

Match the intermediary with the characteristic that best describes its function.
I. Provide protection from adverse events.
II. Pool funds of small savers and invest in either money or capital markets.
III. Provide consumer loans and real estate loans funded by deposits.
IV. Accumulate and transfer wealth from work period to retirement period.
V. Underwrite and trade securities and provide brokerage services.
1. Thrifts
2. Insurers
3. Pension funds
4. Securities firms and investment banks
5. Mutual funds

Accepted Answer

A) 1,3,2,5,4 
B) 4,2,3,5,1 
C) 2,5,1,3,4 
D) 2,4,5,3,1 
E) 5,1,3,2,4 
A) 1,3,2,5,4 
B) 4,2,3,5,1 
C) 2,5,1,3,4 
D) 2,4,5,3,1 
E) 5,1,3,2,4

Question 14

Liquidity risk at a financial intermediary (FI)is the risk

Accepted Answer

A) that promised cash flows from loans and securities held by FIs may not be paid in full. 
B) incurred by an FI when the maturities of its assets and liabilities do not match. 
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. 
D) incurred by an FI when its investments in technology do not result in cost savings or revenue growth. 
E) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. 
A) that promised cash flows from loans and securities held by FIs may not be paid in full. 
B) incurred by an FI when the maturities of its assets and liabilities do not match. 
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. 
D) incurred by an FI when its investments in technology do not result in cost savings or revenue growth. 
E) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

Question 15

The average cost incurred by financial institutions to collect information is larger than that of individuals.

Accepted Answer

A) True 
 B)False

Question 16

Financial intermediation provides direct transfer of funds to the users.

Accepted Answer

A) True 
 B)False

Question 17

________ and ________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.

Accepted Answer

A) Diversification; high equity returns 
B) Price risk; collateral 
C) Free riders; regulations 
D) Monitoring; diversification 
E) Primary markets; foreign exchange markets 
A) Diversification; high equity returns 
B) Price risk; collateral 
C) Free riders; regulations 
D) Monitoring; diversification 
E) Primary markets; foreign exchange markets

Question 18

Central governments sometimes indirectly intervene in foreign exchange markets by affecting foreign exchange rates through raising or lowering interest rates.

Accepted Answer

A) True 
 B)False

Question 19

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely

Accepted Answer

A) conduct an IPO with the assistance of an investment banker. 
B) engage in a secondary market sale of equity. 
C) conduct a private placement to a large number of potential buyers. 
D) place an ad in the Wall Street Journal soliciting retail suppliers of funds. 
E) issue bonds with the assistance of a dealer. 
A) conduct an IPO with the assistance of an investment banker. 
B) engage in a secondary market sale of equity. 
C) conduct a private placement to a large number of potential buyers. 
D) place an ad in the Wall Street Journal soliciting retail suppliers of funds. 
E) issue bonds with the assistance of a dealer.

Question 20

Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?

Accepted Answer

-Money supply transmission: Depository i

Exam 1: Introduction

The Volcker Rule prohibits U.S. depository institutions from engaging in proprietary trading.

Insolvency risk at a financial intermediary (FI)is the risk

There are three types of major financial markets today: primary,secondary,and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

How can using indirect finance rather than direct finance reduce agency costs associated with monitoring funds demanders?

What determines the price of financial instruments? Which are riskier,capital market instruments or money market instruments? Why?

How can a depository intermediary afford to purchase long-term risky direct claims from funds demanders and finance these purchases with safe,liquid,short-term,low-denomination deposits? What can go wrong in this process?

Depository institutions (DIs)play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy because

Primary markets are markets in which users of funds raise cash by selling securities to funds suppliers.

Financial intermediaries (FIs)can offer savers a safer,more liquid investment than a capital market security,even though the intermediary invests in risky illiquid instruments because

Corporate security issuers are always directly involved in funds transfers in the secondary market.

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. Morgan Stanley is acting as a(n)

Liquidity risk at a financial intermediary (FI)is the risk

The average cost incurred by financial institutions to collect information is larger than that of individuals.

Financial intermediation provides direct transfer of funds to the users.

________ and ________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.

Central governments sometimes indirectly intervene in foreign exchange markets by affecting foreign exchange rates through raising or lowering interest rates.

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely

Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

and allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.