Question 1

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 2

Which of the following statements is true?

Accepted Answer

A) Secondary claims often have inferior liquidity attributes compared to primary securities. 
B) Secondary claims often have superior liquidity attributes compared to primary securities. 
C) Secondary claims and primary claims often have the same liquidity attributes. 
D) There is no general relationship between the liquidity attributes of primary and secondary claims.

Question 3

Which of the following statements is true regarding the percentage share of assets of financial institutions in Australia as of end June 2013?

Accepted Answer

A) The largest percentage of assets is held by money market corporations. 
B) The largest percentage of assets is held by credit unions. 
C) The largest percentage of assets is held by permanent building societies. 
D) The largest percentage of assets is held by banks.

Question 4

Which of the following is an adequate definition of broad money?

Accepted Answer

A) Currency plus bank current deposits of the private non-bank sector 
B) 'M1' plus borrowings from the private sector by non-bank financial institutions less the latter's holdings of currency and bank deposits 
C) 'M3' plus non-deposit borrowings from the private sector by all financial intermediaries (AFIs), less the holdings of currency and bank deposits by RFCs and cash management trusts 
D) None of the listed options are correct.

Question 5

Why are financial institutions special? Give three concrete examples.

Accepted Answer

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

Question 6

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 7

None of the commercial banks in the US defaulted during the global financial crisis.

Accepted Answer

A) True 
 B)False

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

Secondary securities are securities issued by FIs and backed by:

Accepted Answer

A) the real assets of the FI 
B) primary securities 
C) guarantees 
D) any type of collateral

Question 10

Net regulatory burden is defined as the difference between the:

Accepted Answer

A) private costs of regulations and the private benefits for the producers of financial services 
B) public costs of regulations and the public benefits for the producers of financial services 
C) private costs of regulations and the public benefits for the producers of financial services 
D) public costs of regulations and the private benefits for the producers of financial services

Question 11

The part of the money supply directly produced by the government or central bank is called:

Accepted Answer

A) inside money 
B) outside money 
C) direct money 
D) indirect money

Question 12

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 13

FIs play a significant role in the transmission of monetary policy.

Accepted Answer

A) True 
 B)False

Question 14

In its role as a delegated monitor, an FI:

Accepted Answer

A) keeps track of required interest and principal payments on loans it originates 
B) works with financially distressed borrowers in danger of defaulting on their loans 
C) holds portfolios of loans that they continue to service 
D) All of the listed options are correct.

Question 15

Which of the following is not a major function of financial intermediaries?

Accepted Answer

A) brokerage services 
B) asset transformation services 
C) information production 
D) management of the nation's money supply

Question 16

Net regulatory burden for FIs is higher because regulators may require the FI to:

Accepted Answer

A) hold more capital than what would be held without regulation 
B) produce less information than would be produced without regulation 
C) hold more debt than what would be held without regulation 
D) hold fewer reserves than they would without regulation

Question 17

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 18

In the principal-agent relationship between savers and a borrowing firm the savers are the agents and the borrowing firm is the principal.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is true?

Accepted Answer

A) In a world without financial intermediaries the level of fund flows between household savers and the corporate sector is likely to be as high as it is with financial intermediaries. 
B) In a world without financial intermediaries funds would directly flow from surplus units to deficit units. 
C) In a world without financial intermediaries lenders (households) would need to monitor the actions of the firms to which they have lent their funds. 
D) In a world without financial intermediaries funds would directly flow from surplus units to deficit units and lenders (households) would need to monitor the actions of the firms to which they have lent their funds.

Question 20

An example of negative externality is the costs faced by small businesses in a one-bank town if the local bank fails.

Accepted Answer

A) True 
 B)False

Exam 1: Why Are Financial Institutions Special

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?

Which of the following statements is true regarding the percentage share of assets of financial institutions in Australia as of end June 2013?

Which of the following is an adequate definition of broad money?

Why are financial institutions special? Give three concrete examples.

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

None of the commercial banks in the US defaulted during the global financial crisis.

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

Secondary securities are securities issued by FIs and backed by:

Net regulatory burden is defined as the difference between the:

The part of the money supply directly produced by the government or central bank is called:

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

FIs play a significant role in the transmission of monetary policy.

In its role as a delegated monitor, an FI:

Which of the following is not a major function of financial intermediaries?

Net regulatory burden for FIs is higher because regulators may require the FI to:

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.

In the principal-agent relationship between savers and a borrowing firm the savers are the agents and the borrowing firm is the principal.

Which of the following statements is true?

An example of negative externality is the costs faced by small businesses in a one-bank town if the local bank fails.