Question 1

The charter values of FIs will be higher if regulators

Accepted Answer

A) increase the cost of entry by requiring more capital. 
B) restrict the number of activities permitted by FIs, thereby increasing potential profits. 
C) restrict the number of FIs that can operate in a given market. 
D) increase the cost of entry by requiring more capital and restrict the number of activities permitted by FIs. 
E) Increase the cost of entry by requiring more capital, and restrict the number of FIs that can operate in a given market. 
A) increase the cost of entry by requiring more capital. 
B) restrict the number of activities permitted by FIs, thereby increasing potential profits. 
C) restrict the number of FIs that can operate in a given market. 
D) increase the cost of entry by requiring more capital and restrict the number of activities permitted by FIs. 
E) Increase the cost of entry by requiring more capital, and restrict the number of FIs that can operate in a given market.

Question 2

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

Accepted Answer

A) True 
 B)False

Question 3

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

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

A significant recent trend in the provision of financial services is that households increasingly prefer denomination intermediation and information services provided by

Accepted Answer

A) mutual funds and money market mutual funds. 
B) commercial banks. 
C) insurance companies. 
D) hedge funds. 
E) investment banks. 
A) mutual funds and money market mutual funds. 
B) commercial banks. 
C) insurance companies. 
D) hedge funds. 
E) investment banks.

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

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.

Question 8

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 9

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 10

In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by Canadian households.

Accepted Answer

A) True 
 B)False

Question 11

All of the following are examples of participants in the shadow banking system EXCEPT

Accepted Answer

A) money market mutual funds (MMMFs). 
B) structured investment vehicles (SIVs). 
C) credit hedge funds. 
D) limited-purpose finance companies. 
E) credit unions. 
A) money market mutual funds (MMMFs). 
B) structured investment vehicles (SIVs). 
C) credit hedge funds. 
D) limited-purpose finance companies. 
E) credit unions.

Question 12

Deposit-taking institutions serve as the primary conduit through which monetary policy actions impact the economy.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Many households place funds with financial institutions because many FI accounts provide

Accepted Answer

A) lower denominations than other securities. 
B) flexible maturities verses other interest-earning securities. 
C) better liquidity than directly negotiated debt contracts. 
D) less price risk if interest rates change. 
E) All of these. 
A) lower denominations than other securities. 
B) flexible maturities verses other interest-earning securities. 
C) better liquidity than directly negotiated debt contracts. 
D) less price risk if interest rates change. 
E) All of these.

Question 15

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 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 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 16

The liabilities of deposit-taking institutions are significant components of the money supply.

Accepted Answer

A) True 
 B)False

Question 17

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

Accepted Answer

A) True 
 B)False

Question 18

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 these. 
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 these.

Question 19

Which of the following observations is true?

Accepted Answer

A) The 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) The 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 20

Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.

Accepted Answer

A) True 
 B)False

Exam 1: Why Are Financial Institutions Special

The charter values of FIs will be higher if regulators

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.

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

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

A significant recent trend in the provision of financial services is that households increasingly prefer denomination intermediation and information services provided by

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

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

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

In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by Canadian households.

All of the following are examples of participants in the shadow banking system EXCEPT

Deposit-taking institutions serve as the primary conduit through which monetary policy actions impact the economy.

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

Many households place funds with financial institutions because many FI accounts provide

FIs perform their intermediary function in two ways

The liabilities of deposit-taking institutions are significant components of the money supply.

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

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?

Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

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 Index

Filters