Ch1 - Testbank PDF

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1.

Financial intermediaries specialize in the production of money. True False

2.

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities. True False

3.

Financial institutions intermediate between suppliers and demanders of money. True False

4.

If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals. True False

5.

Because of changes in regulatory barriers, technology and financial innovation, a single financial service firm may now be able to offer a full set of financial services. True False

6.

The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing primary claims issued by households and other investors. True False

7.

Secondary securities are securities that back primary securities. True False

8.

FIs are independent market parties that create financial parties whose value is the transformation of financial risk. True False

9.

Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs. True False

10. Financial institutions who participate in the derivative securities markets reduce transaction and information costs for firms and consumers wanting to hedge their risk. True False

11. The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is caused by the choice of assets that are less than perfectly positively correlated. True False 12. The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk. True False 13. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower. True False 14. FIs typically provide secondary claims to household savers that have inferior liquidity attributes than the primary securities of corporations such as equity and bonds. True False 15. Financial institutions provide economies of scale in the area of information collection. True False 16. Depository institutions serve as a conduit through which monetary policy actions impact the economy. True False 17. The liabilities of depository institutions are significant components of the money supply. True False 18. Commercial banks and finance companies traditionally have served the needs of the residential real estate market. True False 19. The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation. True False 20. The efficiency with which FIs provide payment services directly benefits the economy. True False 21. Small investors in mutual funds often are able to realize larger returns than they would receive from bank deposits. True False 22. Time intermediation involves the investment of small amounts by investors into mutual funds which then invest in long-term securities such as bonds and equities. True False

23. Unfairly excluding some potential financial service consumers from the marketplace is a reason why FIs must absorb net regulatory burden. True False 24. In an attempt to enhance the net social welfare benefits of the services of financial intermediaries, safety and soundness regulation involves the holding of a minimum level of cash reserves against deposits. True False 25. Verification of requirements that encourage FIs to diversity their assets is the goal of credit allocation regulation. True False 26. The purpose of guaranty funds in safety and soundness regulation is to protect claim holders when an FI collapses or fails. True False 27. In most countries, cash is required to be held in reserve against deposits. True False 28. The qualified thrift lender test is utilized to verify whether an institution can serve as an FI. True False 29. Credit allocation regulations typically are designed for the benefit of customers as well as the financial institution that must implement the guidelines. True False 30. The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors. True False 31. The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation. True False 32. Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry. True False 33. As an asset transformer, the FI issues financial claims that are far more attractive to household savers than the claims directly issued by corporations. True False

34. Shares of savings and demand deposits have decreased and shares of pension funds have all increased for household financial assets held in the United States in recent years. True False 35. The share of financial assets controlled by depository institutions has been increasing in recent years. True False 36. One reason for the increasing share of total financial assets controlled by pension funds and investment companies is that they exploit the comparative advantages of size and diversification. True False 37. Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts. True False 38. Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs. True False 39. The commoditization of many FI products is evidence of the inefficient institutionalization by financial markets of products that have standardized terms and characteristics. True False 40. Privately placed bonds and equity can be traded on the secondary market because of amendments to Regulation 144A. True False 41. The Internet has allowed individual investors to purchase securities while enjoying decreased transactions costs. True False 42. Which of the following statements is false? A. A financial intermediary specializes 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 payments mechanism D. A financial intermediary acts as a broker to bring together funds deficit and funds surplus units E. A financial intermediary acts as a lender of last resort 43. Which function of an FI reduces transaction and information costs between a corporation and individual thereby encouraging a higher rate of savings? A. Brokerage services B. Asset transformation services C. Information production services D. Money supply management E. Administration of the payments mechanism

44. In its role as a delegated monitor, the FI A. Keeps track of required interest and principal payments B. Works with financially distressed borrowers in danger of defaulting on their loans C. Holds portfolios of loans D. Maintains contact with borrowers so as to ensure that loan proceeds are utilized for intended purposes E. All of the above 45. Which of the following is not a major function of financial intermediaries? A. Brokerage services B. Asset transformation services C. Information production D. Management of the nation's money supply E. Administration of the payments mechanism 46. The reason FIs can offer highly liquid and low price-risk contracts to savers while investing in relatively illiquid and higher price-risk assets is A. Because diversification allows an FI to predict more accurately the expected returns on its asset portfolio B Significant amounts of portfolio risk are diversified away by investing in assets that have correlations . between returns that are less than perfectly positive C. Because individual savers cannot benefit from risk diversification D. All of the above E. Only A and C above 47. The federal government extends a safety net to FIs consisting of A. Deposit insurance, discount window borrowing and reserve requirements B. Deposit insurance and discount window borrowing C. Deposit insurance, unemployment insurance and discount window borrowing D. Deposit insurance, open market operations and discount window borrowing E. Deposit insurance protection 48. Asset transformation consists of A. Receipt of securities across electronic payments systems B. Altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolio C. Granting loans to transform funds deficit units into funds surplus units D. None of the above E. All of the above 49. This refers to the risk that the firm's owners or managers will take actions with the saver's money contrary to the promises contained in the covenants of its securities contracts. A. Liquidity risk B. Price risk C. Credit risk D. Intermediation E. Agency costs

50. Which of the following refers to the term "maturity intermediation"? 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 E. Ability to transfer wealth from one generation to the next 51. Regulation of FIs is A. Minimal, as evidenced by the recent thrift debacle B. Extensive, as a result of the importance of FI to the state of the economy C. Minimal, because the free market is allowed to allocate financial resources D. Extensive, because banks have monopoly power E. No different from regulation of nonfinancial firms 52. Which of the following measures the difference between the private costs of regulations and the private benefits for the producers of financial services? A. Capital adequacy B. Agency costs C. Net regulatory burden D. Charter value E. Liquidity risk 53. FIs are special because A. Their failure can impose negative externalities on the economy B. They receive special regulatory oversight C. Their business is the management of money D. They provide a source of backup liquidity to nonfinancial firms E. We are studying them 54. What is globalization? A. The process whereby FI focus more intensely on their own domestic market B. Acceptance of the Federal Reserve as the regulator of the world financial system C. Usually refers to the initiation of GLOBEX, a new international financial communications and trading system D. The evolution of markets and institutions so that geographic boundaries do not restrict financial transactions E. Joint ownership of international electronic payments systems 55. Negative externalities occur when A. The fear of FI insolvency leads to bank deposit runs B. Lending activity is curtailed C. There are delays in disbursements from insolvent FIs D. All of the above E. A and B only

56. Identify the procedure by which a banker refuses to make loans to residents living inside given geographic boundaries. A. Credit allocation B. Redlining C. Intermediation D. Externalization E. Spinning 57. Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer? A. The bank failure usually leads to a government bailout B. There are fewer steel manufacturers than there are banks C. The large bank failure reduces credit availability throughout the economy D. Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets E. Everyone needs money, but not everyone needs steel 58. Why do households prefer to use FIs as "middle persons" to invest their surplus funds? A. Since FIs are very efficient, the middle person's transaction costs are quite low B. To achieve the benefits of diversification C. The FI has can invest in information less costlier than individual households D. All of the above E. Answers B and C 59. Financial intermediaries are A. Funds surplus units, because they exist to make money B. Funds deficit units, because they must pay heavy regulatory fees and taxes C. Funds surplus units, because they hold large portfolios of financial securities D. Funds deficit units, because they must comply with minimum capital requirements E. Neither funds surplus nor deficit units 60. Which of the following observations is true? A. Central bank directly controls both inside and outside money B. Outside money is that part of the money supply produced by the private banking system C. Inside money refers to the quantity of notes and coin in the economy D. Bulk of the money supply consists of inside money E. Central banks cannot vary the quantity of outside money 61. Net regulatory burden for FIs is higher because regulators may require FIs A. To hold more capital than what would be held without regulation B. To produce less information than would be produced without regulation C. To hold more debt than what would be held without regulation D. Answers A and B E. Answers A and C

62. What distinguishes financial intermediaries from industrial firms? A FI balance sheets are almost totally comprised of financial securities whereas commercial firms hold . substantial amounts of real assets B. Industrial firms are the customers of FIs C. FIs deal exclusively in primary securities while Industrial firms specialize in secondary securities D. Industrial firms produce real goods or services while FIs only manipulate money E. Industrial firms are unregulated while FIs are heavily regulated 63. The origination of a home mortgage loan is considered to be a A. Primary security, because this is the FI's primary source of business B. Secondary security, because mortgages are typically resold in the secondary market C. Primary security, because the mortgage I.O.U. is a newly created security D. Secondary security for resales of existing homes and a primary security for new home sales E. Cannot determine because of insufficient information 64. How have the innovations of global financial networks and computerized money and information transfer systems transformed financial intermediation? A. Financial intermediation has become riskier because it is more difficult to stay informed about worldwide events B. Financial intermediation has become more costly because it is now necessary to invest in high cost technology C. Financial intermediation has been unaffected D. Financial intermediation has become more costly as global firms exploit economies of scale and scope E. Financial intermediation has become less risky as firms become adept at maintaining zero gap positions 65. The charter values of FIs will be higher if regulators A. Increase the cost of entry by requiring more capital B. Restrict the number of activities permitted by FIs, thereby increasing potential profits C. Restrict the number of FIs that can operate in a given market D. Answers A and B E. Answers A and C 66. In a world without FIs, households will be less willing to invest in the corporate sector because A. They are not able to monitor the activities of the corporation more closely than FIs B. They prefer to invest in longer term securities C. They are subject to price risk on the sale of securities D. Answers A and B E. Answers A and C 67. FIs perform their intermediary function in two ways A. They specialize as brokers between savers and users B. They serve as asset transformers by purchasing primary securities and issuing secondary securities C. They serve as asset transformers by purchasing secondary securities and issuing primary securities D. Answers A and B E. Answers A and C

68. Which of the following is true of secondary securities? A. They include equities, bonds and other debt claims B. They are backed by the real assets of corporations issuing them C. They are securities that back primary securities D. They are securities issued by FIs E. Both A and B are true 69. The following are special functions that are performed by FIs at a macro level except A. Transmission of monetary policy B. Credit allocation C. Intergenerational wealth transfers or time intermediation D. Denomination intermediation E. Interbank lending and investing 70. Which of the following is closely associated with credit allocation regulation? A. Support the FI's lending to socially important sectors B. Transmission of monetary policy from the Federal Reserve to the economy C. Ensure the safety and soundness of the FI D. Prevent discrimination in lending on the basis of age, race, sex or income E. Protect investors against abuses 71. Verifying the minimum level of capital or equity funds that must be held to fund the operations of an FI is part of the goal of A. Investor protection regulation B. Safety and soundness regulation C. Entry regulation D. Credit allocation regulation E. Consumer protection regulation 72. The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to help meet the A. Entry regulation B. Credit allocation regulation C. Investor protection regulation D. Safety and soundness regulation E. Consumer protection regulation 73. Price and quantity restrictions in regulation usually are aimed at determining whether an FI is meeting certain A. Consumer protection guidelines B. Credit allocation guidelines C. Investor protection guidelines D. Safety and soundness guidelines E. Entry regulation guidelines

74. The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system except A. Encouraging banks to rely more on deposits as opposed to debt or capital as a cushion against failure B. Encouraging banks to limit lending to a single customer to no more than 10% of capital C. To provide deposit insurance D. To monitor banks periodically E. Encouraging banks to produce timely accounting statements and reports. 75. The April 1990 amendment to SEC regulation 144A A. Removed size restrictions on trading of privately placed securities B. Allowed large investors to trade privately placed securities among themselves C. Defined large investors allowed to trade privately placed securities as those with assets greater than $400 million D. Gave small savers access to the private placement market E. Answers A and C 76. Safety and soundness regulations include all of the following layers of protection except A. The provision of guaranty funds B. Requirements encouraging diversification of assets C. The creation of money for those FIs in financial trouble D. Minimum levels of capital E. Monitoring and surveillance 77. Which of the following groups of FIs are characterized by the highest percentage growth of assets in the U.S. financial services industry during the past sixty years? A. Commercial banks B. Thrifts C. Life insurance companies D. Investment companies E. Finance companies 78. Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking, insurance and investment banking? A. Financial Institutions Reform Recovery and Enforcement Act (1989) B. Financial Services Modernization Act (1999) C. Competitive Equality in Banking Act (1987) D. The Bank Holding Company Act (1956) E. Garn-St. Germain Depository Institutions Act (1982)

ch1 Key 1.

Financial intermediaries specialize in the production of money. FALSE Saunders - Chapter 01 #1

2.

The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities. TRUE Saunders - Chapter 01 #2

3.

Financial institutions intermediate between suppliers and demanders of money. TRUE Saunders - Chapter 01 #3

4.

If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals. ...