Question 1

Price risk refers to:

Accepted Answer

A)  the risk that the sale price of an asset will be lower than the purchase price of that asset. 
B)  the risk that the purchase price of an asset will be lower than the sale price of that asset. 
C)  the risk that the sale price of an asset will be higher than the purchase price of that asset. 
D)  None of the listed options are correct.

Question 2

Graphically explain the differences between the flow of funds in an economy without financial intermediaries and the flow of funds in an economy with financial intermediaries.

Accepted Answer

The answer of Graphically explain the differences between the flow...

Question 3

Which of the following statements is true in the context of diversification?

Accepted Answer

A)  As long as the return on different investments is not perfectly positively correlated, financial intermediaries can diversify away significant amounts of portfolio risk. 
B)  As long as the return on different investments is not perfectly negatively correlated, financial intermediaries can diversify away significant amounts of portfolio risk. 
C)  As long as the return on different investments is perfectly positively correlated, financial intermediaries can diversify away significant amounts of portfolio risk. 
D)  None of the listed options are correct.

Question 4

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 5

Which function of an FI reduces transaction and information costs between a corporation and an individual and may encourage a higher rate of savings?

Accepted Answer

A)  Brokerage services. 
B)  Asset transformation services. 
C)  Information production services. 
D)  Money supply management.

Question 6

Which of the following statements is true?

Accepted Answer

A)  Primary securities are securities issued by corporations and backed by the real assets of those corporations. 
B)  Secondary securities are securities issued by corporations and backed by the real assets of those corporations. 
C)  Dominant securities are securities issued by corporations and backed by the real assets of those corporations. 
D)  Preliminary securities are securities issued by corporations and backed by the real assets of those corporations.

Question 7

Which of the following statements is true?

Accepted Answer

A)  Bank loans that represent more than 5 per cent of a banking group's capital must be reported quarterly to APRA. 
B)  Bank loans that represent more than 10 per cent of a banking group's capital must be reported quarterly to APRA. 
C)  Bank loans that represent more than 5 per cent of a banking group's liabilities must be reported quarterly to APRA. 
D)  Bank loans that represent more than 10 per cent of a banking group's liabilities must be reported quarterly to APRA.

Question 8

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system except:

Accepted Answer

A)  encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure. 
B)  encouraging banks to limit lending to a single customer to no more than 10 per cent of capital. 
C)  the provision of deposit insurance. 
D)  the periodic monitoring of banks.

Question 9

Which of the following refers to the term 'maturity intermediation'?

Accepted Answer

A)  Creation of a secondary market mature enough to withstand volatility. 
B)  Overcoming constraints to buying assets imposed by large minimum denomination size. 
C)  Mismatching the maturities of assets and liabilities. 
D)  Reducing information costs or imperfections between households and corporations.

Question 10

Which of the following statements is false?

Accepted Answer

A)  A financial intermediary specialises in the production of information. 
B)  A financial intermediary reduces its risk exposure by pooling its assets. 
C)  A financial intermediary benefits society by providing a mechanism for payments. 
D)  A financial intermediary acts as a lender of last resort.

Question 11

Savers increasingly favour investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

Accepted Answer

A) True 
 B)False

Question 12

In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits.

Accepted Answer

A) True 
 B)False

Question 13

Due to the costs of monitoring, liquidity and price risk savers often prefer to hold the financial claims issued by FIs rather than those issued by corporations.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds?

Accepted Answer

A)  Liquidity risk. 
B)  Price risk. 
C)  Credit risk. 
D)  Agency costs.

Question 15

Which of the following statements is true?

Accepted Answer

A)  Bank failures may destroy household savings and restrict a firm's access to credit. 
B)  Bank failures may create doubts in savers' minds regarding the stability and solvency of financial intermediaries in general. 
C)  Bank failures may threaten the stability of the financial system. 
D)  All of the listed options are correct.

Question 16

Why are financial institutions special? Give three concrete examples.

Accepted Answer

The answer of Why are financial institutions special? Give three...

Question 17

By acting as a delegated monitor, financial intermediaries reduce the degree of information imperfection and asymmetry between the ultimate suppliers and users of funds.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following are reasons for the specialness of financial intermediaries?

Accepted Answer

A)  Higher average information costs. 
B)  Lower price risk and superior liquidity attributes for financial claims to household savers. 
C)  Higher average transaction costs. 
D)  All of the listed options are correct.

Question 19

Which of the following are types of regulation that seek to enhance the net social welfare benefits of financial intermediaries' services?

Accepted Answer

A)  exit regulation 
B)  issuer protection regulation 
C)  credit allocation regulation 
D)  All of the listed options are correct.

Question 20

Economies of scale is the concept that:

Accepted Answer

A)  a cost reduction in trading and other transaction services results from increased efficiency when FIs perform these services. 
B)  a profitability increase in trading and other transaction services results from increased efficiency when FIs perform these services. 
C)  a cost reduction in trading and other transaction services results from stable efficiency when FIs perform these services. 
D)  None of the listed options are correct.

Exam 1: Why Are Financial Institutions Special

Price risk refers to:

Graphically explain the differences between the flow of funds in an economy without financial intermediaries and the flow of funds in an economy with financial intermediaries.

Which of the following statements is true in the context of diversification?

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

Which function of an FI reduces transaction and information costs between a corporation and an individual and may encourage a higher rate of savings?

Which of the following statements is true?

Which of the following statements is true?

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system except:

Which of the following refers to the term 'maturity intermediation'?

Which of the following statements is false?

Savers increasingly favour investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits.

Due to the costs of monitoring, liquidity and price risk savers often prefer to hold the financial claims issued by FIs rather than those issued by corporations.

Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds?

Which of the following statements is true?

Why are financial institutions special? Give three concrete examples.

By acting as a delegated monitor, financial intermediaries reduce the degree of information imperfection and asymmetry between the ultimate suppliers and users of funds.

Which of the following are reasons for the specialness of financial intermediaries?

Which of the following are types of regulation that seek to enhance the net social welfare benefits of financial intermediaries' services?

Economies of scale is the concept that: