Question 1

The proportion of financial assets controlled by depository institutions has been increasing in recent years.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

The concept of enterprise risk management encourages FIs to manage all of the risks to which they are exposed as a portfolio, rather than managing each risk individually.

Accepted Answer

A) True 
 B)False

Question 6

FIs perform their intermediary function in two ways

Accepted Answer

A) they specialize as brokers between savers and users. 
B) they serve as asset transformers by purchasing primary securities and issuing secondary securities. 
C) they serve as asset transformers by purchasing secondary securities and issuing primary securities. 
D) they specialize as brokers between savers and users and they serve as asset transformers by purchasing primary securities and issuing secondary securities. 
E) they specialize as brokers between savers and users and they serve as asset transformers by purchasing secondary securities and issuing primary securities. 
A) they specialize as brokers between savers and users. 
B) they serve as asset transformers by purchasing primary securities and issuing secondary securities. 
C) they serve as asset transformers by purchasing secondary securities and issuing primary securities. 
D) they specialize as brokers between savers and users and they serve as asset transformers by purchasing primary securities and issuing secondary securities. 
E) they specialize as brokers between savers and users and they serve as asset transformers by purchasing secondary securities and issuing primary securities.

Question 7

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 8

Financial institutions act as intermediaries between suppliers and users of money.

Accepted Answer

A) True 
 B)False

Question 9

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 10

In its role as a delegated monitor, an FI

Accepted Answer

A) keeps track of required interest and principal payments on loans it originates. 
B) works with financially distressed borrowers in danger of defaulting on their loans. 
C) holds portfolios of loans that they continue to service. 
D) maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. 
E) All of the options. 
A) keeps track of required interest and principal payments on loans it originates. 
B) works with financially distressed borrowers in danger of defaulting on their loans. 
C) holds portfolios of loans that they continue to service. 
D) maintains contact with borrowers to ensure that loan proceeds are utilized for intended purposes. 
E) All of the options.

Question 11

Negative externalities exist in the depository sector when

Accepted Answer

A) the fear of DI insolvency leads to bank deposit runs. 
B) lending activity is impaired or constrained. 
C) there are delays in disbursements from insolvent DIs. 
D) banks that are healthy suffer when another bank nears insolvency. 
E) All of the options. 
A) the fear of DI insolvency leads to bank deposit runs. 
B) lending activity is impaired or constrained. 
C) there are delays in disbursements from insolvent DIs. 
D) banks that are healthy suffer when another bank nears insolvency. 
E) All of the options.

Question 12

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

Question 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

Each of the following is a special function performed by FIs at a macro level EXCEPT

Accepted Answer

A) transmission of monetary policy. 
B) credit allocation. 
C) intergenerational wealth transfers or time intermediation. 
D) denomination intermediation. 
E) interbank lending and investing. 
A) transmission of monetary policy. 
B) credit allocation. 
C) intergenerational wealth transfers or time intermediation. 
D) denomination intermediation. 
E) interbank lending and investing.

Question 19

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 20

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

Exam 1: Why Are Financial Institutions Special

The proportion of financial assets controlled by depository institutions has been increasing in recent years.

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

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

Depository financial institutions include all of the following EXCEPT

The concept of enterprise risk management encourages FIs to manage all of the risks to which they are exposed as a portfolio, rather than managing each risk individually.

FIs perform their intermediary function in two ways

Which of the following is true of secondary securities?

Financial institutions act as intermediaries between suppliers and users of money.

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

In its role as a delegated monitor, an FI

Negative externalities exist in the depository sector when

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

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

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

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

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

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

Each of the following is a special function performed by FIs at a macro level EXCEPT

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

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.

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

Fintech 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