Question 1

Risk sharing is profitable for financial institutions due to ________.

Accepted Answer

A)  low transactions costs
B)  asymmetric information
C)  adverse selection
D)  moral hazard A

Question 2

The process of asset transformation refers to the conversion of ________.

Accepted Answer

A)  safer assets into risky assets
B)  safer assets into safer liabilities
C)  risky assets into safer assets
D)  risky assets into risky liabilities C

Question 3

A liquid asset is ________.

Accepted Answer

A)  an asset that can easily and quickly be sold to raise cash
B)  a share of an ocean resort
C)  difficult to resell
D)  always sold in an over-the-counter market A

Question 4

Financial intermediaries provide customers with liquidity services. Liquidity services ________.

Accepted Answer

A)  make it easier for customers to conduct transactions
B)  allow customers to have a cup of coffee while waiting in the lobby
C)  are a result of the asymmetric information problem
D)  are another term for asset transformation

Question 5

The process of indirect finance using financial intermediaries is called ________.

Accepted Answer

A)  direct lending
B)  financial intermediation
C)  resource allocation
D)  financial liquidation

Question 6

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets.

Accepted Answer

A)  adverse selection; moral hazard
B)  adverse selection; risk sharing
C)  moral hazard; transactions costs
D)  adverse selection; economies of scale

Question 7

Which of the following financial intermediaries is not a depository institution?

Accepted Answer

A)  A savings and loan association
B)  A commercial bank
C)  A credit union
D)  A finance company

Question 8

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as ________.

Accepted Answer

A)  foreign bonds
B)  Eurobonds
C)  equity bonds
D)  country bonds

Question 9

Which of the following is a depository institution?

Accepted Answer

A)  A life insurance company
B)  A credit union
C)  A pension fund
D)  A mutual fund

Question 10

Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from ________.

Accepted Answer

A)  government agencies
B)  equities markets
C)  financial intermediaries
D)  bond markets

Question 11

Which of the following statements about the characteristics of debt and equity is false?

Accepted Answer

A)  They can both be long-term financial instruments.
B)  They can both be short-term financial instruments.
C)  They both involve a claim on the issuer's income.
D)  They both enable a corporation to raise funds.

Question 12

The primary liabilities of a chartered bank are ________.

Accepted Answer

A)  bonds
B)  mortgages
C)  deposits
D)  commercial paper

Question 13

Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems.

Accepted Answer

The answer of Because there is an imbalance of information...

Question 14

How do regulators help to ensure the soundness of financial intermediaries?

Accepted Answer

The answer of How do regulators help to ensure the...

Question 15

Explain why Government of Canada Treasury Bills are considered as a financial instrument with very low risk.

Accepted Answer

The answer of Explain why Government of Canada Treasury Bills...

Question 16

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

Accepted Answer

A)  adverse selection; moral hazard
B)  moral hazard; adverse selection
C)  costly state verification; free-riding
D)  free-riding; costly state verification

Question 17

A breakdown of financial markets can result in ________.

Accepted Answer

A)  financial stability
B)  rapid economic growth
C)  political instability
D)  stable prices

Question 18

A goal of the Ontario Securities Commission is to reduce problems arising from ________.

Accepted Answer

A)  competition
B)  banking panics
C)  risk
D)  asymmetric information

Question 19

An important function of secondary markets is to ________.

Accepted Answer

A)  make it easier to sell financial instruments to raise funds
B)  raise funds for corporations through the sale of securities
C)  make it easier for governments to raise taxes
D)  create a market for newly constructed houses

Question 20

Adverse selection is a problem associated with equity and debt contracts arising from ________.

Accepted Answer

A)  the lender's relative lack of information about the borrower's potential returns and risks of his investment activities
B)  the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults
C)  the borrower's lack of incentive to seek a loan for highly risky investments
D)  the borrower's lack of good options for obtaining funds

Exam 2: An Overview of the Financial System