Question 1

How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation?

Accepted Answer

A) Financial intermediation has become riskier because it is more difficult to stay informed about worldwide events. 
B) Financial intermediation has become more costly because it is necessary to invest in high cost technology. 
C) Financial intermediation has been unaffected. 
D) Financial intermediation has become more costly as global firms exploit economies of scale and scope. 
E) Financial intermediation has become less risky as firms become adept at maintaining zero gap positions. 
A) Financial intermediation has become riskier because it is more difficult to stay informed about worldwide events. 
B) Financial intermediation has become more costly because it is necessary to invest in high cost technology. 
C) Financial intermediation has been unaffected. 
D) Financial intermediation has become more costly as global firms exploit economies of scale and scope. 
E) Financial intermediation has become less risky as firms become adept at maintaining zero gap positions.

Question 2

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 3

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 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 ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

Accepted Answer

A) True 
 B)False

Question 6

Negative externalities exist in the deposit-taking sector when

Accepted Answer

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

Question 7

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT

Accepted Answer

A) monitoring done by the bank on your behalf. 
B) increased liquidity if funds are needed quickly. 
C) increased transactions costs. 
D) less price risk when funds are needed. 
E) better diversification of deposited funds. 
A) monitoring done by the bank on your behalf. 
B) increased liquidity if funds are needed quickly. 
C) increased transactions costs. 
D) less price risk when funds are needed. 
E) better diversification of deposited funds.

Question 8

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Accepted Answer

A) True 
 B)False

Question 9

Of the ten largest banks in the world by asset size at the beginning of 2012, how many were Canadian banks?

Accepted Answer

A) 0. 
B) 1. 
C) 2. 
D) 4. 
E) 8. 
A) 0. 
B) 1. 
C) 2. 
D) 4. 
E) 8.

Question 10

Online access to financial services has allowed individual investors to purchase securities while benefiting from decreased transactions costs.

Accepted Answer

A) True 
 B)False

Question 11

In a world without FIs, households will be less willing to invest in corporate securities because they

Accepted Answer

A) are not able to monitor the activities of the corporation more closely than FIs. 
B) tend to prefer shorter, more liquid securities. 
C) are subject to price risk when corporate securities are sold. 
D) may not have enough funds to purchase corporate securities. 
E) All of these. 
A) are not able to monitor the activities of the corporation more closely than FIs. 
B) tend to prefer shorter, more liquid securities. 
C) are subject to price risk when corporate securities are sold. 
D) may not have enough funds to purchase corporate securities. 
E) All of these.

Question 12

As DTIs 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 Bank of Canada 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 Bank of Canada decreased the number of services that banks could provide. 
E) it became more difficult for households to obtain credit.

Question 13

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 14

FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 these. 
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 these.

Question 17

What is globalization?

Accepted Answer

A) The process that causes an FI to focus more intensely on their own domestic market. 
B) Acceptance of the Federal Reserve as the regulator of the world financial system. 
C) Usually refers to the initiation of GLOBEX, a new international financial communications and trading system. 
D) The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions. 
E) Joint ownership of international electronic payments systems. 
A) The process that causes an FI to focus more intensely on their own domestic market. 
B) Acceptance of the Federal Reserve as the regulator of the world financial system. 
C) Usually refers to the initiation of GLOBEX, a new international financial communications and trading system. 
D) The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions. 
E) Joint ownership of international electronic payments systems.

Question 18

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 19

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 20

Which of the following is closely associated with credit allocation regulation?

Accepted Answer

A) Support the FI's lending to socially important sectors. 
B) Transmission of monetary policy from the Bank of Canada to the economy. 
C) Ensure the safety and soundness of the FI. 
D) Prevent discrimination in lending on the basis of age, race, sex, or income. 
E) Protect investors against abuses. 
A) Support the FI's lending to socially important sectors. 
B) Transmission of monetary policy from the Bank of Canada to the economy. 
C) Ensure the safety and soundness of the FI. 
D) Prevent discrimination in lending on the basis of age, race, sex, or income. 
E) Protect investors against abuses.

Exam 1: Why Are Financial Institutions Special

How have the innovations of global financial networks and computerized money and information transfer systems changed financial intermediation?

What distinguishes financial intermediaries from industrial firms?

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.

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 ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.

Negative externalities exist in the deposit-taking sector when

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Of the ten largest banks in the world by asset size at the beginning of 2012, how many were Canadian banks?

Online access to financial services has allowed individual investors to purchase securities while benefiting from decreased transactions costs.

In a world without FIs, households will be less willing to invest in corporate securities because they

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

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

FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.

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.

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

What is globalization?

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

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

Which of the following is closely associated with credit allocation regulation?

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