Deck 8: An Introduction to Financial Intermediaries and Risk

Question 1

The key to growth and survival in the financial services industry is (are) the creation of new

A)financial instruments.
B)financial markets.
C)financial institutions.
D)All of the above are correct.

Answer 1

D

Question 2

What do an insurance company and a commercial bank have in common?

A)Both are financial intermediaries.
B)Both link net borrowers with net lenders.
C)Both provide the public with a wide range of financial services.
D)All of the above are correct.

Answer 2

D

Question 3

Financial claims against financial intermediaries include

A)checking deposits and auto loans
B)saving deposits and mortgages
C)time deposits, mortgages, and savings deposits
D)checking deposits, savings deposits, and time deposits

Answer 3

D

Question 4

Financial intermediaries are in debt to

A)net lenders.
B)net borrowers.
C)only other intermediaries.
D)the U.S. Treasury.

Question 5

Why do financial intermediaries provide the public with a wide range of financial services?

A)because intermediaries are required by law to do so
B)because intermediaries are, by and large, profit seeking
C)because intermediaries just like to make people happy
D)because intermediaries are better at appraising the risk of default associated with lending to particular borrowers

Question 6

__________ are highly liquid deposits that can usually be withdrawn on demand but not by writing a check.

A)Contingent claims
B)Savings deposits
C)Time deposits
D)Transactions deposits

Question 7

__________ are deposits that have a scheduled maturity and a penalty for early withdrawal.

A)Contingent claims
B)Savings deposits
C)Time deposits
D)Transactions deposits

Question 8

__________ are deposits that can be exchanged for currency and that are used to make payments through writing a check or making an electronic transfer.

A)contingent claims
B)savings deposits
C)time deposits
D)transactions deposits

Question 9

Why are financial intermediaries regulated?

A)to provide a smooth running financial system
B)to protect the public from fraud
C)to preserve the public's confidence in the safety and soundness of the system
D)All of the above are correct.

Question 10

Which of the following is not a reason financial institutions are regulated?

A)to provide a smooth running financial system
B)to make sure banks keep interest rates low
C)to preserve the public's confidence in the safety and soundness of the system
D)All of the above are correct.

Question 11

Which of the following statements about balance sheets is false?

A)Balance sheets present the monetary value of a change in an economic unit's assets, liabilities, and net worth over a particular period of time, say one year.
B)The fundamental balance sheet identity is that assets equal liabilities plus net worth.
C)Balance sheets present the monetary value of an economic unit's assets, liabilities, and net worth.
D)If the value of liabilities is greater than the value of assets, net worth is negative.

Question 12

Which of the following statements best describes a bank's capital base?

A)the value of liabilities minus the value of assets
B)the value of assets minus the value of liabilities
C)the value of assets minus the value of net worth
D)the value of assets plus the value of net worth

Question 13

Which of the following serve as an asset for depository institutions?

A)small time and saving deposits
B)checkable deposits
C)large time deposits
D)reserves at the Fed

Question 14

Which of the following do not serve as an asset(s) for depository institutions?

A)small time and saving deposits
B)checkable deposits
C)large time deposits
D)None of the above are assets for depository institutions.

Question 15

Which of the following can serve as either an asset or a liability for a depository institution?

A)customer time and saving deposits
B)the funds customers borrow
C)repurchase agreements
D)reserves

Question 16

The most significant overall economic function of FIs is to

A)provide checking accounts.
B)strengthen the dollar.
C)simplify borrowing and lending resulting in the proper allocation of resources to capital.
D)provide services for government.

Question 17

Contingent claims offer insurance benefits from the unfortunate financial effects of which of the following?

A)death
B)theft
C)natural disasters
D)All of the above are correct.

Question 18

When regulating FIs, government regulators are concerned with which of the following?

A)providing adequate profit margins for FIs to prevent their failure
B)establishing new financial data
C)promoting competition, soundness, and safety in financial services
D)Both a and c are correct.

Question 19

Which of the following is a regulatory restriction on financial intermediaries?

A)Savings and loans cannot acquire common stock in publicly held corporations.
B)Financial intermediaries currently have ceilings on interest rates.
C)Banks cannot currently have branches in more than three states.
D)All of the above are correct.

Question 20

Which of the following is false?

A)Financial intermediaries have experienced tremendous growth in recent decades and have become relatively more important than direct financing that bypasses intermediaries.
B)Financial intermediaries have become less specialized over time.
C)Depository institutions are the most important type of financial intermediary.
D)Financial intermediaries have become more diversified and offered the public a wider range of financial services.

Question 21

Which intermediary relies most heavily on commercial paper as a source of funds?

A)money market mutual funds
B)finance companies
C)insurance companies
D)S&Ls

Question 22

Which of the following is not or has not been directly regulated in the financial system?

A)the types of liabilities and assets certain intermediaries are allowed to acquire
B)entry into the industry
C)the geographic area in which a firm locates
D)profits

Question 23

Which of the following is or has been directly regulated in the financial system?

A)the types of liabilities and assets certain intermediaries are allowed to acquire
B)entry into the industry
C)the geographic area in which a firm locates
D)All of the above are or have been regulated.

Question 24

Which of the following is the risk involved with unanticipated changes in the return on assets and the cost of liabilities?

A)interest rate risk
B)default risk
C)credit risk
D)liquidity risk

Question 25

If FIs borrow short-term from depositors and purchase long-term bonds, what risk are they exposed to?

A)liquidity risk
B)credit risk
C)interest rate risk
D)default risk

Question 26

Which of the following risks is of most concern to an insurance company during a natural disaster?

A)exchange rate risk
B)liquidity risk
C)swap risk
D)default risk

Question 27

Which of the following is the risk that FIs face when depositors withdraw deposits without warning?

A)liquidity risk
B)default risk
C)exchange rate risk
D)interest rate risk

Question 28

An FI can reduce liquidity risk by which of the following?

A)requiring rigid credit checks
B)making long-term loans
C)holding highly liquid assets
D)All of the above are correct.

Question 29

The risk associated with borrowers not repaying financial claims is which of the following?

A)exchange rate risk
B)default risk
C)liquidity risk
D)interest rate risk

Question 30

The risk associated with declining spreads between assets and liabilities is which of the following?

A)exchange rate risk
B)default risk
C)liquidity risk
D)interest rate risk

Question 31

The risk associated with unavailable funds when there is a need to make a payment is which of the following?

A)exchange rate risk
B)default risk
C)liquidity risk
D)interest rate risk

Question 32

The risk associated with changes in the dollar value of foreign financial assets is which of the following?

A)exchange rate risk
B)default risk
C)liquidity risk
D)interest rate risk

Question 33

If an intermediary holds foreign financial assets and if the dollar appreciates, ceteris paribus, the dollar value of the foreign exchange will do which of the following?

A)increase
B)decrease
C)remain the same
D)increase by decreasing rates

Question 34

Decisions FIs make about the composition of assets are

A)related to the maturity, riskiness, and liquidity of their liabilities.
B)dissimilar to their liabilities.
C)highly risky.
D)highly liquid.

Question 35

Which depository institution is not considered a thrift?

A)S&Ls
B)savings banks
C)commercial banks
D)credit unions

Question 36

Which depository institution is considered a thrift?

A)S&Ls
B)savings banks
C)credit unions
D)All of the above are considered thrifts.

Question 37

Which FIs are not considered depository institutions?

A)commercial banks
B)mutual funds
C)credit unions
D)S&Ls

Question 38

Why are deposit-type FIs important in the nation's money supply?

A)only their assets are used as money
B)they are all nationally chartered and therefore members of the Federal Reserve System
C)their deposit liabilities are checkable deposits
D)they have no liabilities

Question 39

A bank's success depends in particular upon

A)its ability to attract transaction deposits
B)its ability to attract savings deposits
C)its ability to attract time deposits
D)All of the above are correct.

Question 40

What is the major difference between a savings deposit and a time deposit?

A)savings deposits are less liquid
B)savings deposits can usually be withdrawn on demand whereas time deposits may have a penalty for early withdrawal
C)savings deposits can be withdrawn by writing a check
D)savings deposits are not insured by the FDIC

Question 41

Money market deposit accounts offer which of the following?

A)limited check-writing privileges
B)higher interest than other checkable deposits
C)Both of the above are correct.
D)None of the above is correct.

Question 42

The largest source of funds for commercial banks is which of the following?

A)deposits
B)loans
C)fed funds
D)borrowings

Question 43

A bank's liquidity needs can best be satisfied by holding

A)small business loans.
B)Treasury bills.
C)long-term Treasury securities.
D)both small business loans and long-term Treasury securities.

Question 44

For what reason do banks hold reserves?

A)to meet safety objectives
B)to meet liquidity objectives
C)to meet Federal Reserve requirements
D)All of the above are correct

Question 45

The capital base is the value of a bank's

A)assets plus the value of its liabilities.
B)Fed funds minus repurchase agreements.
C)assets minus the value of its liabilities.
D)time deposits minus the value of its liabilities.

Question 46

Savings and loan associations were originally known as which of the following?

A)savings associations
B)national thrift leagues
C)continental banks
D)building and loan associations

Question 47

Savings and loan associations were originally known as which of the following?

A)provident Loan Societies
B)building and loan associations
C)continental banks
D)loan sharks

Question 48

Savings and loan associations were developed to primarily help

A)finance international trade.
B)promote large business loans.
C)finance the construction and purchase of new housing.
D)provide insurance services.

Question 49

Major sources of funds for savings associations include which of the following?

A)time deposits
B)checkable deposits
C)savings deposits
D)All of the above are correct.

Question 50

Which of the following intermediaries uses its funds primarily to acquire mortgage loans?

A)commercial banks
B)savings associations
C)credit unions
D)finance companies

Question 51

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 did which of the following?

A)expanded the assets savings and loan associations could acquire
B)created a new federal regulatory structure for the savings and loan industry
C)reduced savings and loan associations required capital
D)All of the above are correct.

Question 52

The largest asset of credit unions is

A)checkable deposits.
B)large time deposits.
C)consumer credit.
D)mortgages.

Question 53

Interest-earning checking accounts at credit unions are called which of the following?

A)time deposits
B)interest accounts
C)fed fund accounts
D)share draft accounts

Question 54

By definition, credit union members must share a common bond; therefore a credit union can cater to

A)an employer
B)a church
C)a labor union
D)All of the above

Question 55

A difference between credit unions and commercials banks is that

A)credit unions are tax exempt
B)credit unions are not regulated by the federal government
C)credit unions do not offer transactions deposits
D)commercial banks are tax exempt

Question 56

Casualty and life insurance benefits that over time offer the public protection from the often catastrophic financial effects of theft, accidents, natural disasters, and death are called

A)contingent claims.
B)savings deposits.
C)time deposits.
D)transactions deposits.

Question 57

Which is the largest asset held by life insurance companies?

A)corporate and foreign bonds
B)government and agency securities
C)equities
D)mortgages

Question 58

The largest single class of investors in equities is which of the following?

A)credit unions
B)savings associations
C)commercial banks
D)pension funds

Question 59

Which of the following provide protection against unexpected occurrences to homes and automobiles in exchange for paid premiums?

A)pension funds
B)casualty companies
C)life insurance companies
D)All of the above are correct.

Question 60

What functions do mutual funds perform for the public?

A)They acquire and pool funds from the public.
B)They invest the funds in capital market instruments.
C)They return the income received minus a management fee.
D)All of the above are functions of mutual funds.

Question 61

Money market mutual funds acquire funds from individual investors and pool them to purchase money market instruments such as

A)Treasury bills
B)bank CDs
C)initial stock offerings
D)All of the above are correct.
E)Both a and b are correct.

Question 62

The single largest group of contractual FIs in terms of total assets is

A)pension plans
B)commercial banks
C)Treasury Direct
D)Euro Disney

Question 63

Which of the following is a true statement?

A)Banks do not hold corporate equities because regulations prohibit it.
B)FIs are not necessarily a predictable inflow of funds.
C)Tax exempt FIs hold tax-exempt municipal securities.
D)S&Ls specialize in small business loans.

Question 64

The Gramm-Leach-Bliley Act (GLBA)

A)removed decades-old barriers between banking and other financial services by creating financial holding companies.
B)bailed out the failed savings and loan industry.
C)further regulated banks and other depository institutions in an attempt to reverse trends that were occurring within the industry.
D)made nonfinancial firms such as Sears, AT&T and General Motors into financial supermarkets.

Question 65

__________ is the risk that changes in the exchange rate will cause the dollar value of foreign exchange or foreign financial assets to fall.

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

Question 66

__________ is the risk that the interest rate will unexpectedly change so that the costs of the liabilities of an FI exceed the earnings on its assets.

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

Question 67

__________ is the risk that the FI will be required to make a payment when the intermediary has only long-term assets that cannot be disposed of quickly without a capital loss.

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

Question 68

The text discusses all of the following types of risk except

A)interest rate risk.
B)exchange rate risk.
C)purchasing power risk.
D)credit risk.

Question 69

An example of default risk is

A)a borrower refusing to make his car payments.
B)a change in the interest rate such that a borrower pays off her mortgage loan early.
C)a change in the exchange rate such that an FI's foreign assets lose value in dollar terms.
D)an FI's inability to make payments without first selling long-term assets.

Question 70

Which of the following would be an example of interest rate risk?

A)An increase in interest rates such that the return on an FI's assets increases relative to the costs of its liabilities.
B)An increase in interest rates so that the costs of an FI's liabilities increase relative to the return on its assets.
C)A decrease in interest rates such that the return on an FI's assets increases relative to the costs of its liabilities.
D)A change in interest rates such that the return on an FI's assets exceeds the costs of its liabilities.

Question 71

Which of the following could be characterized as a cash flow problem?

A)default risk
B)interest rate risk
C)liquidity risk
D)exchange rate risk

Question 72

A depreciation of the yen could expose an FI that is holding supplies of yen to which of the following types of risk?

A)default risk
B)interest rate risk
C)liquidity risk
D)exchange rate risk

Question 73

Contingent claims are

A)claims like commercial paper, which are issued by finance companies.
B)claims like checkable deposits, which are contingent upon a depositor asking for his or her money back.
C)claims defined by contract.
D)claims defined by regulators.

Question 74

Why do FI's provide the public with a wide range of financial services?

A)Because intermediaries are required by law to do so.
B)Because intermediaries are, by and large, profit seeking.
C)Because intermediaries just like to make people happy.
D)Because intermediaries are better at appraising the risk of default associated with lending to particular borrowers.

Question 75

Which of the following would be considered a financial claim against a financial intermediary?

A)deposits
B)business loans
C)reserves
D)government securities

Question 76

When interest rates fluctuate widely, FIs react by utilizing which of the following?

A)financial futures
B)swaps
C)options
D)All of the above are used.

Question 77

If FIs hold foreign financial assets, they are exposed to what risk?

A)default risk
B)liquidity risk
C)exchange rate risk
D)interest rate risk

Question 78

Which of the following institutions would be least likely to hold municipal securities?

A)commercial bank
B)credit union
C)life insurance company
D)casualty insurance company

Question 79

Which of the following FIs would not hold corporate equities (stock)?

A)commercial bank
B)pension fund
C)life insurance company
D)casualty insurance company

Question 80

In general, the main variance among FIs is which of the following?

A)the risks associated with borrowing
B)the risks associated with lending
C)the composition of their balance sheet
D)is becoming more significant over time