Deck 10: Financial Innovation

Question 1

Of the following, which is not considered an important factor in recent financial innovations?

A)stable interest rates
B)volatile prices
C)increased competition in financial markets
D)technological advancement in payment technologies

Answer 1

A

Question 2

Investing in which of the following may, but not necessarily, reduce prepayment risk?

A)asset-backed securities
B)collateralized mortgage obligations
C)mortgage-backed securities
D)mortgages

Answer 2

B

Question 3

) ____________________________ is the risk that mortgages will be paid off early when interest rates fall.

A)Liquidity risk
B)Prepayment risk
C)Exchange rate risk
D)Interest rate risk

Answer 3

B

Question 4

Since the mid-1960s, the growth of financial innovation has been

A)stagnant.
B)declining.
C)relatively slow in growth.
D)swift.

Question 5

The _____________________is the way funds are transferred to complete exchanges.

A)payments mechanism
B)clearing of checks by the Fed
C)electronic funds transfer
D)point-of-sale terminal

Question 6

To curb loans to stock speculators, limits were put on the proportion of stock purchases that could be financed by borrowing. These limits are called

A) Regulation Q.
B) margin requirements.
C) Regulation
D) the Gramm-Leach-Bliley limits.

Question 7

The ability to be easily converted from one type of financial instrument to another is

A)usury.
B)fungibility.
C)financial intermediation.
D)uniform reserve requirements.

Question 8

Unbundling reduces what kind of risk(s) associated with a financial asset?

A)credit and interest rate risk
B)liquidity risk
C)exchange rate risk
D)All of the above are risks associate with a financial asset.

Question 9

Disintermediation is

A)the removal of funds from financial intermediaries.
B)the disposing of assets by intermediaries to obtain funds to pay depositors.
C)the disruptive to the process of allocating resources to capital formation.
D)All of the above are disintermediation.

Question 10

Money market funds were developed in part due to which of the following?

A)low interest rates
B)Regulation Q
C)usury ceilings
D)All of the above are reasons money market funds were developed.

Question 11

Derivatives

A)allow for the unbundling of risks.
B)can be sold separately to those most willing and able to bear the risk.
C)derive their value from the underlying asset.
D)All of the above are true of derivatives.

Question 12

Financial forward, futures, and options markets attempt to hedge interest rate and exchange rate risks and these instruments are known as

A)integrals.
B)derivatives.
C)money market mutual funds.
D)MMFs and integrals.

Question 13

What benefit factors exists as an incentive to engage in innovation?

A)increases in inflation and interest rates
B)increases in domestic and global competition
C)price and interest rate volatility
D)All of the above are correct.

Question 14

Benefits and costs of financial innovation are

A)dependent.
B)interdependent.
C)co-dependent.
D)independent.

Question 15

When does financial innovation occur?

A)when benefits are less than costs
B)when technology changes
C)when inflation falls
D)when inflation rises

Question 16

Nondeposit liabilities are not subject to reserve requirements and avoided Regulation Q interest rate ceilings. Which of the following is not an example of a non-deposit liability?

A)negotiable CDs
B)eurodollars
C)fed funds
D)repurchase agreements

Question 17

The relabeling of deposit liabilities as non-deposit liabilities avoided which of the following

A)Regulation Q only.
B)Regulation D only.
C)Gramm-Leach-Bliley limits.
D)Regulations D and Q.

Question 18

Which of the following is considered a characteristic of a nondeposit liability?

A)freedom from reserve requirements
B)subject to Regulation Q ceilings
C)regulated interest rates
D)subject to slightly lower reserve requirements than deposit liabilities

Question 19

Which regulation sets reserve requirements?

A)Regulation A
B)Regulation D
C)Regulation Q
D)Regulation S and P

Question 20

A repurchase agreement is best described as

A)an agreement exchanged in the overnight borrowing and selling of reserves.
B)a kind of time deposit that pays a market rate of interest and can be resold in a secondary market.
C)an agreement to use dollar-denominated deposits from abroad to fund domestic loans.
D)a secured loan with a government security serving as collateral.

Question 21

Retail sweep accounts

A)involve the relabeling of deposit liabilities to nondeposit liabilities.
B)"sweep" balances out of transactions accounts that are subject to reserve requirements and into other accounts that are not.
C)cause required reserves to fall by the amount of funds swept into sweep accounts multiplied by the required reserve ratio.
D)All of the above are correct

Question 22

Which of the following played a key role in the process of financial innovation in the 1960s?

A)deregulation
B)the avoidance of regulations
C)decreasing volatility in prices, inflation, interest rates, and exchange rates
D)decreasing competition

Question 23

Which of the following statements about the changing composition of liabilities for large commercial banks is true? Since the 1960s, large commercial banks

A)have decreased their reliance on nondeposit liabilities.
B)have increased their reliance on nondeposit liabilities as a source of funds.
C)have reduced their use of the fed funds market.
D)have increasingly relied on transactions deposits as a growing proportion of their total liabilities.

Question 24

Deregulation legislation enacted by Congress in 1980 and 1982 resulted in which of the following?

A)Regulation Q was phased out
B)banks and thrifts had expanded asset and liability powers
C)thrifts were allowed to offer checkable deposits
D)All of these answers are correct

Question 25

__________ are borrowed funds, such as Eurodollar borrowings, fed funds, and repurchase agreements, which are not deposits, which are not subject to reserve requirements, and which were not subject to Regulation Q ceilings.

A)Collateralized mortgage obligations
B)Asset-backed securities
C)Nondeposit liabilities
D)Interest rate swaps

Question 26

The payments mechanism is

A)how money is transferred among transactors.
B)the balance sheet of an individual transactor.
C)an indication of a point of sale terminal.
D)Both a and b are correct.

Question 27

Financial contracts in which two parties trade interest payment streams to guarantee that the inflows of payments will more closely match the outflows are often referred to as

A)collateralized mortgage obligations.
B)retail sweep accounts.
C)securitizations.
D)swaps.

Question 28

Swaps are used to

A)ease the buying and selling of retail sweep accounts.
B)ease the buying and selling of collateralized mortgage obligations.
C)hedge against liquidity risk.
D)reduce the risk of future interest rate changes or of future foreign exchange rate changes.

Question 29

Interest rate swaps are used mainly by which of the following?

A)commercial banks and savings and loans
B)other intermediaries
C)government agencies and securities dealers
D)All of the above are correct.

Question 30

An interest rate swap agreement is which of the following?

A)A standardized contract to buy and sell financial assets in the future at an interest rate set today
B)an agreement between two parties to trade principal payments at a later date regardless of the interest rate
C)an agreement between two parties to trade interest payment streams
D)None of the above is correct.

Question 31

Interest rate swaps can guarantee that

A)inflows more closely match outflows.
B)participants never hold fixed-rate instruments.
C)participants never hold variable-rate instruments.
D)all intermediaries will hold both fixed-rate and variable-rate assets.

Question 32

What is the function of a credit derivative?

A)to transfer risk to another party for a fee
B)to derive their value from the underlying debt instruments such as loans
C)for the purchaser of the credit derivative, to hedge default risk like an insurance policy against default would
D)All of the above are functions of a credit derivative.

Question 33

A ________________________ is a financial innovation used to hedge exchange rate risk over a long time whereby one party agrees to trade periodic payments in a given currency with another party who agrees to do the same in a different currency.

A)interest rate swap agreement
B)collateralized mortgage obligation
C)securitization
D)currency swap agreement

Question 34

Securitization is the process whereby

A)relatively liquid assets are packaged together and sold to mutual funds.
B)relatively illiquid assets are packaged together and sold to mutual funds only.
C)relatively liquid assets are packaged together and sold to individual investors.
D)relatively illiquid assets are packaged together and sold to individual investors.

Question 35

Securitizations involve which of the following?

A)mortgages and car loans
B)credit card balances
C)small business loans
D)All of the above are correct.

Question 36

Securitization has spread to which of the following markets?

A)credit card balances, automobile and truck loans, computer leases, home equity loans
B)student loans, railroad car leases, accounts receivable, small business loans, and boat loans
C)Both a and b are correct.
D)None of the above is correct.

Question 37

____________________are securitizations that direct the cash flow of mortgage-related products to various classes of bondholders thus creating financial instruments with varying prepayment risks and varying returns.

A)Mortgage-backed securities
B)Asset-backed securities
C)Collateralized mortgage obligations
D)Derivatives

Question 38

Advantages of securitization include all of the following except:

A)reduced credit risk because of the government guarantee on all mortgage backed securitizations.
B)that new funds to lend are provided to banks and other issuers of asset-backed securities when new asset-backed securities are issued.
C)reduced credit risk because of the pooling of assets
D)that small denominations of securitizations are available for investors unable or unwilling to invest larger sums.

Question 39

Securitization develops most easily in markets where financial assets are fairly

A)homogeneous.
B)heterogeneous.
C)unregulated.
D)highly regulated.

Question 40

Which of the following assets have been used in securitization?

A)credit cards
B)student loans
C)Small business loans
D)All of the above have been used in securitization.

Question 41

Which of the following regulations was not instituted as part of banking reform in the 1930s?

A)Regulation Q
B)deposit insurance
C)reserve requirements
D)separation of commercial and investment banking

Question 42

The biggest flaw of the regulatory structure put in place during the Great Depression was in

A)not recognizing the sequence of events that would occur if market interest rates increased and remained above Regulation Q ceilings for a significant time period.
B)not recognizing what would happen if bank runs failed to stop.
C)not recognizing the incentive effects deposit insurance created.
D)not recognizing the sequence of events that would occur if market interest rates fell and remained below Regulation Q ceilings for a significant time period.

Question 43

__________ are borrowed funds, such as Eurodollar borrowings, fed funds, and repurchase agreements, which are not deposits, which are not subject to reserve requirements, and which were not subject to Regulation Q ceilings.

A)Collateralized mortgage obligations
B)Asset-backed securities
C)Nondeposit liabilities
D)Interest rate swaps

Question 44

Of the following, which is not considered an important factor in recent financial innovations?

A)volatile interest rates
B)inflation
C)decreased competition in financial markets
D)changes in regulation

Question 45

Which of the following is false?

A)Financial intermediaries are much more highly specialized today because competition is much greater.
B)Derivatives are tools of risk management that allow for the unbundling or risks.
C)Banks are increasingly relying on fee income as their share of intermediation declines.
D)Banks are much more automated than in the past.

Question 46

Which of the following is false?

A)An electronic funds transfer system eliminates the need for a deposit account.
B)Electronic payments account for about 90 percent of the dollar value of all payments.
C)Examples of electronic funds transfer systems include ATM machines, point-of-sale terminals, cash cards, debt cards, and Internet banking.
D)Many employers currently pay employees by crediting their employees' checking accounts rather than issuing checks.

Question 47

Which of the following is not a characteristic of the banking system in the 2000s?

A)Geographic barriers to the provision of financial services are disappearing.
B)FIs are more automated.
C)Securitization is decreasing.
D)FIs are becoming less specialized.

Question 48

The regulations that regulated the financial system up to the early 1980s were developed during the

A)1920s.
B)1930s.
C)1940s.
D)1960s.

Question 49

The failure of many financial institutions in the 1930s was in part alleged to be the result of which of the following?

A)excessive competition among banks
B)overly risky loans
C)the stock market crash that caused the default on many bank loans
D)All of the above are correct.

Question 50

Which of the following is false?

A)Currency swaps can be used to hedge against exchange rate risk over a multiyear period.
B)Swaps are an example of derivatives and hence are always used to speculate.
C)Currency swaps initially developed to get around regulations that limited capital flows among countries.
D)Currency swaps involve trading a set of payments in one currency for a set of payments in a different currency.

Question 51

Which of the following is false?

A)Swaps allow two parties to hedge interest rate risk for a long period of time, often up to say 15 years.
B)Interest rate swaps allow two parties to trade interest rate streams so that inflows more closely match outflows.
C)A fall in interest rates will hurt an intermediary that is holding fixed rate assets and variable rate liabilities.
D)Swaps originated in 1982.

Question 52

Which of the following statements is false?

A)Regulation and innovation are related in that regulation can lead to innovations to get around regulations.
B)Financial intermediaries are becoming less specialized.
C)Smart cards are widely accepted in vending machines.
D)Deposit accounts are insured up to $250,000.

Question 53

Financial innovation is

A)something which seldom occurs.
B)the creation of new financial instruments.
C)regulated by the government.
D)All of the above are correct.

Question 54

Financial innovations have been developed to deal with

A)persistent deflation.
B)decreased competition in banking.
C)increased price volatility.
D)None of the above is correct.

Question 55

The Glass-Steagall Act separated ________ banking from __________ banking.

A)commercial, investment
B)personal, impersonal
C)free, regulated
D)regulated, free

Question 56

Which of the following is false?

A)Securitization is the process whereby relatively illiquid financial assets are packaged together and sold off to individual investors.
B)Asset-backed securities result from the process of securitization.
C)Securitization is a form of indirect finance.
D)Securitization originated in the mortgage market in the early 1980s.

Question 57

Fungibility refers to

A)the ease to which one financial instrument can be transformed into another.
B)the growing need for technological innovation in financial markets.
C)the removal of funds from financial intermediaries.
D)None of the above is correct.

Question 58

Money market mutual funds were developed in the

A)1960s.
B)1970s.
C)1980s.
D)1990s.

Question 59

The benefits and costs of financial innovations are

A)interdependent.
B)independent.
C)co-dependent.
D)irrelevant.

Question 60

Which of the following is considered a characteristic of a nondeposit liability?

A)freedom from reserve requirements
B) not subject to Regulation Q ceilings
C) freedom of banks to pay the prevailing interest rate in the market
D) All of the above are correct.

Question 61

Which of the following is not considered a nondeposit liability?

A)repurchase agreements
B)fed funds
C)passbook savings
D)eurodollars

Question 62

The Eurodollar market

A) was used to get around both Regulations Q and
B) turns a deposit subject to reserve requirements into a nondeposit liability.
C) is a de facto vehicle to pay interest on corporate demand deposits.
D) All of the above are correct.

Question 63

The Fed funds market was started in the

A)1920s.
B)1930s.
C)1960s.
D)1980s.

Question 64

A repurchase agreement is similar to which of the following?

A)a discount loan
B)a Eurodollar
C)a secured loan
D)a government security

Question 65

Which of the following is considered an important source of funds for large banks?

A)Repurchase agreements
B)Fed funds
C)CDs
D)All of the above are important sources of funds for large banks.

Question 66

Over the last two or three decades, the growth rate of bank deposits relative to the growth rate of other liabilities has been

A)decreasing.
B)increasing.
C)unchanging.
D)decreasing, followed by a relative increase in the growth rate of bank deposits beginning in the mid-1990s.

Question 67

The term deregulation refers to which of the following?

A)redefining the regulations
B)adding updated regulations
C)dismantling regulations
D)deleting outdated regulations and redefining appropriate regulations

Question 68

The growth rate of competition among financial intermediaries has

A)decreased.
B)not changed substantially.
C)increased slightly.
D)increased dramatically.

Question 69

Which of the following best describes the growth rate of geographic barriers to deposit taking and loan granting?

A)Geographic barriers are decreasing slowly.
B)Geographic barriers have decreased rapidly and are virtually nonexistent.
C)There is no change in geographic barriers.
D)Geographic barriers are increasing rapidly.

Question 70

FIs are becoming

A)less diversified.
B)more diversified.
C)less diversified and more competitive.
D)more specialized.

Question 71

The lifting of interest rate ceilings has given banks the opportunity to offer which of the following?

A)higher interest rates on deposits
B)more extensive service to net lenders
C)lower rates on loans
D)uniform reserve requirements

Question 72

Financial futures and options have been developed due to which of the following?

A)increased automation
B)the substitution of physical capital for machines
C)greater interest rate and exchange rate risks
D)global concentration

Question 73

Which of the following is not a major characteristic of the financial system in the early 2000s?

A)increased automation of FIs
B)increased securitization
C)increased share of intermediation for banks
D)increased globalization

Question 74

Historically, intermediaries have been which of the following?

A)highly specialized
B)fairly unregulated
C)motivated chiefly by community concerns
D)All of the above are correct.

Question 75

Which of the following is not a nondeposit liability?

A)fed funds
B)repurchase agreements
C)large negotiable CDs
D)eurodollar borrowings

Question 76

Which of the following statements is false?

A)Regulation and innovation are related in that regulation can lead to innovations to get around regulations.
B)Financial intermediaries are becoming less specialized.
C)Smart cards are widely accepted in vending machines.
D)Deposit accounts are insured up to $250,000.

Question 77

A financial innovation that evaded both Regulation Q (interest rate ceilings) and Regulation D (reserve requirements) is which of the following?

A)eurodollar borrowings
B)large negotiable CDs
C)repurchase agreements
D)money market mutual funds

Question 78

Which of the following played a part in financial innovation during the past 30 years?

A)technological advances in telecommunications
B)profit-seeking opportunities
C)regulatory avoidance and increased competition from other intermediaries and nonfinancial firms
D)All of the above played a part.

Question 79

Which of the following played a part in financial innovation during the past 30 years?

A)technological advances in telecommunications
B)increased geographic barriers to banking
C)reduced competition from other intermediaries and nonfinancial firms
D)All of the above played a part.

Question 80

Which of the following is a deposit liability?

A)fed funds
B)repurchase agreements
C)large negotiable CDs
D)eurodollar borrowings