Chapter 1 problems.pdf

ch1Student: ___________________________________________________________________________

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 informationB. A financial intermediary reduces its risk exposure by pooling its assetsC. A financial intermediary benefits society by providing a payments mechanismD. A financial intermediary acts as a broker to bring together funds deficit and funds surplus unitsE. 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 servicesB. Asset transformation servicesC. Information production servicesD. Money supply managementE. Administration of the payments mechanism

44. In its role as a delegated monitor, the FI A. Keeps track of required interest and principal paymentsB. Works with financially distressed borrowers in danger of defaulting on their loansC. Holds portfolios of loansD. Maintains contact with borrowers so as to ensure that loan proceeds are utilized for intended purposesE. All of the above

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

A. Brokerage servicesB. Asset transformation servicesC. Information productionD. Management of the nation's money supplyE. 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 portfolioB.

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 diversificationD. All of the aboveE. 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 requirementsB. Deposit insurance and discount window borrowingC. Deposit insurance, unemployment insurance and discount window borrowingD. Deposit insurance, open market operations and discount window borrowingE. Deposit insurance protection

48. Asset transformation consists of

A. Receipt of securities across electronic payments systemsB. Altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolioC. Granting loans to transform funds deficit units into funds surplus unitsD. None of the aboveE. 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 riskB. Price riskC. Credit riskD. IntermediationE. Agency costs

50. Which of the following refers to the term "maturity intermediation"? A. Creation of a secondary market mature enough to withstand volatilityB. Overcoming constraints to buying assets imposed by large minimum denomination sizeC. Mismatching the maturities of assets and liabilitiesD. Reducing information costs or imperfections between households and corporationsE. Ability to transfer wealth from one generation to the next

51. Regulation of FIs is

A. Minimal, as evidenced by the recent thrift debacleB. Extensive, as a result of the importance of FI to the state of the economyC. Minimal, because the free market is allowed to allocate financial resourcesD. Extensive, because banks have monopoly powerE. 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 adequacyB. Agency costsC. Net regulatory burdenD. Charter valueE. Liquidity risk

53. FIs are special because

A. Their failure can impose negative externalities on the economyB. They receive special regulatory oversightC. Their business is the management of moneyD. They provide a source of backup liquidity to nonfinancial firmsE. We are studying them

54. What is globalization?

A. The process whereby FI focus more intensely on their own domestic marketB. Acceptance of the Federal Reserve as the regulator of the world financial systemC. Usually refers to the initiation of GLOBEX, a new international financial communications and trading

systemD. The evolution of markets and institutions so that geographic boundaries do not restrict financial

transactionsE. Joint ownership of international electronic payments systems

55. Negative externalities occur when

A. The fear of FI insolvency leads to bank deposit runsB. Lending activity is curtailedC. There are delays in disbursements from insolvent FIsD. All of the aboveE. 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 allocationB. RedliningC. IntermediationD. ExternalizationE. 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 bailoutB. There are fewer steel manufacturers than there are banksC. The large bank failure reduces credit availability throughout the economyD. Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank

assetsE. 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 lowB. To achieve the benefits of diversificationC. The FI has can invest in information less costlier than individual householdsD. All of the aboveE. Answers B and C

59. Financial intermediaries are

A. Funds surplus units, because they exist to make moneyB. Funds deficit units, because they must pay heavy regulatory fees and taxesC. Funds surplus units, because they hold large portfolios of financial securitiesD. Funds deficit units, because they must comply with minimum capital requirementsE. Neither funds surplus nor deficit units

60. Which of the following observations is true?

A. Central bank directly controls both inside and outside moneyB. Outside money is that part of the money supply produced by the private banking systemC. Inside money refers to the quantity of notes and coin in the economyD. Bulk of the money supply consists of inside moneyE. 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 regulationB. To produce less information than would be produced without regulationC. To hold more debt than what would be held without regulationD. Answers A and BE. 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 FIsC. FIs deal exclusively in primary securities while Industrial firms specialize in secondary securitiesD. Industrial firms produce real goods or services while FIs only manipulate moneyE. 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 businessB. Secondary security, because mortgages are typically resold in the secondary marketC. Primary security, because the mortgage I.O.U. is a newly created securityD. Secondary security for resales of existing homes and a primary security for new home salesE. 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 eventsB. Financial intermediation has become more costly because it is now necessary to invest in high cost

technologyC. Financial intermediation has been unaffectedD. Financial intermediation has become more costly as global firms exploit economies of scale and scopeE. 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 capitalB. Restrict the number of activities permitted by FIs, thereby increasing potential profitsC. Restrict the number of FIs that can operate in a given marketD. Answers A and BE. 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 FIsB. They prefer to invest in longer term securitiesC. They are subject to price risk on the sale of securitiesD. Answers A and BE. Answers A and C

67. FIs perform their intermediary function in two ways

A. They specialize as brokers between savers and usersB. They serve as asset transformers by purchasing primary securities and issuing secondary securitiesC. They serve as asset transformers by purchasing secondary securities and issuing primary securitiesD. Answers A and BE. Answers A and C

68. Which of the following is true of secondary securities? A. They include equities, bonds and other debt claimsB. They are backed by the real assets of corporations issuing themC. They are securities that back primary securitiesD. They are securities issued by FIsE. 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 policyB. Credit allocationC. Intergenerational wealth transfers or time intermediationD. Denomination intermediationE. 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 sectorsB. Transmission of monetary policy from the Federal Reserve to the economyC. Ensure the safety and soundness of the FID. Prevent discrimination in lending on the basis of age, race, sex or incomeE. 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 regulationB. Safety and soundness regulationC. Entry regulationD. Credit allocation regulationE. Consumer protection regulation

72. The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to help meet

the A. Entry regulationB. Credit allocation regulationC. Investor protection regulationD. Safety and soundness regulationE. Consumer protection regulation

73. Price and quantity restrictions in regulation usually are aimed at determining whether an FI is meeting

certain A. Consumer protection guidelinesB. Credit allocation guidelinesC. Investor protection guidelinesD. Safety and soundness guidelinesE. 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 failureB. Encouraging banks to limit lending to a single customer to no more than 10% of capitalC. To provide deposit insuranceD. To monitor banks periodicallyE. 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 securitiesB. Allowed large investors to trade privately placed securities among themselvesC. Defined large investors allowed to trade privately placed securities as those with assets greater than $400

millionD. Gave small savers access to the private placement marketE. Answers A and C

76. Safety and soundness regulations include all of the following layers of protection except

A. The provision of guaranty fundsB. Requirements encouraging diversification of assetsC. The creation of money for those FIs in financial troubleD. Minimum levels of capitalE. 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 banksB. ThriftsC. Life insurance companiesD. Investment companiesE. 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


3. Financial institutions intermediate between suppliers and demanders of money.

TRUE


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


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


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. FALSE


7. Secondary securities are securities that back primary securities.

FALSE


8. FIs are independent market parties that create financial parties whose value is the transformation of

financial risk. TRUE


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


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


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


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

risk. FALSE


13. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less

monitoring power and control over the borrower. 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. FALSE


15. Financial institutions provide economies of scale in the area of information collection.

TRUE


16. Depository institutions serve as a conduit through which monetary policy actions impact the economy.

TRUE


17. The liabilities of depository institutions are significant components of the money supply.

TRUE


18. Commercial banks and finance companies traditionally have served the needs of the residential real estate market. FALSE


19. The ability of savers to transfer wealth between youth and old age and across generations is called

maturity intermediation. FALSE


20. The efficiency with which FIs provide payment services directly benefits the economy.

TRUE


21. Small investors in mutual funds often are able to realize larger returns than they would receive from

bank deposits. TRUE


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. FALSE


23. Unfairly excluding some potential financial service consumers from the marketplace is a reason why FIs

must absorb net regulatory burden. 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. FALSE


25. Verification of requirements that encourage FIs to diversity their assets is the goal of credit allocation

regulation. FALSE


26. The purpose of guaranty funds in safety and soundness regulation is to protect claim holders when an FI collapses or fails. TRUE


27. In most countries, cash is required to be held in reserve against deposits.

TRUE


28. The qualified thrift lender test is utilized to verify whether an institution can serve as an FI.

FALSE


29. Credit allocation regulations typically are designed for the benefit of customers as well as the financial

institution that must implement the guidelines. FALSE


30. The passage of legislation to prevent discrimination in lending is an example of regulation to protect

investors. FALSE


31. The passage of legislation to ensure that FIs are meeting the needs of their local communities is an

example of entry regulation. 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. 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


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


35. The share of financial assets controlled by depository institutions has been increasing in recent years. 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


37. Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities

than do commercial banks and thrifts. 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


39. The commoditization of many FI products is evidence of the inefficient institutionalization by financial

markets of products that have standardized terms and characteristics. FALSE


40. Privately placed bonds and equity can be traded on the secondary market because of amendments to

Regulation 144A. TRUE


41. The Internet has allowed individual investors to purchase securities while enjoying decreased

transactions costs. TRUE


42. Which of the following statements is false?

A. A financial intermediary specializes in the production of informationB. A financial intermediary reduces its risk exposure by pooling its assetsC. A financial intermediary benefits society by providing a payments mechanismD. A financial intermediary acts as a broker to bring together funds deficit and funds surplus unitsE. 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 servicesB. Asset transformation servicesC. Information production servicesD. Money supply managementE. Administration of the payments mechanism


44. In its role as a delegated monitor, the FI

A. Keeps track of required interest and principal paymentsB. Works with financially distressed borrowers in danger of defaulting on their loansC. Holds portfolios of loansD. Maintains contact with borrowers so as to ensure that loan proceeds are utilized for intended

purposesE. All of the above


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

A. Brokerage servicesB. Asset transformation servicesC. Information productionD. Management of the nation's money supplyE. 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

portfolioB.

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 diversificationD. All of the aboveE. 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 requirementsB. Deposit insurance and discount window borrowingC. Deposit insurance, unemployment insurance and discount window borrowingD. Deposit insurance, open market operations and discount window borrowingE. Deposit insurance protection


48. Asset transformation consists of A. Receipt of securities across electronic payments systemsB. Altering the liquidity and maturity features of funds sources used to finance the FI's asset portfolioC. Granting loans to transform funds deficit units into funds surplus unitsD. None of the aboveE. 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 riskB. Price riskC. Credit riskD. IntermediationE. Agency costs


50. Which of the following refers to the term "maturity intermediation"?

A. Creation of a secondary market mature enough to withstand volatilityB. Overcoming constraints to buying assets imposed by large minimum denomination sizeC. Mismatching the maturities of assets and liabilitiesD. Reducing information costs or imperfections between households and corporationsE. Ability to transfer wealth from one generation to the next


51. Regulation of FIs is

A. Minimal, as evidenced by the recent thrift debacleB. Extensive, as a result of the importance of FI to the state of the economyC. Minimal, because the free market is allowed to allocate financial resourcesD. Extensive, because banks have monopoly powerE. 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 adequacyB. Agency costsC. Net regulatory burdenD. Charter valueE. Liquidity risk


53. FIs are special because A. Their failure can impose negative externalities on the economyB. They receive special regulatory oversightC. Their business is the management of moneyD. They provide a source of backup liquidity to nonfinancial firmsE. We are studying them


54. What is globalization?

A. The process whereby FI focus more intensely on their own domestic marketB. Acceptance of the Federal Reserve as the regulator of the world financial systemC. Usually refers to the initiation of GLOBEX, a new international financial communications and

trading systemD. The evolution of markets and institutions so that geographic boundaries do not restrict financial

transactionsE. Joint ownership of international electronic payments systems


55. Negative externalities occur when

A. The fear of FI insolvency leads to bank deposit runsB. Lending activity is curtailedC. There are delays in disbursements from insolvent FIsD. All of the aboveE. 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 allocationB. RedliningC. IntermediationD. ExternalizationE. 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 bailoutB. There are fewer steel manufacturers than there are banksC. The large bank failure reduces credit availability throughout the economyD. Since the steel company's assets are tangible, they are more easily reallocated than the intangible

bank assetsE. 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 lowB. To achieve the benefits of diversificationC. The FI has can invest in information less costlier than individual householdsD. All of the aboveE. Answers B and C


59. Financial intermediaries are

A. Funds surplus units, because they exist to make moneyB. Funds deficit units, because they must pay heavy regulatory fees and taxesC. Funds surplus units, because they hold large portfolios of financial securitiesD. Funds deficit units, because they must comply with minimum capital requirementsE. Neither funds surplus nor deficit units


60. Which of the following observations is true?

A. Central bank directly controls both inside and outside moneyB. Outside money is that part of the money supply produced by the private banking systemC. Inside money refers to the quantity of notes and coin in the economyD. Bulk of the money supply consists of inside moneyE. 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 regulationB. To produce less information than would be produced without regulationC. To hold more debt than what would be held without regulationD. Answers A and BE. 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 assetsB. Industrial firms are the customers of FIsC. FIs deal exclusively in primary securities while Industrial firms specialize in secondary securitiesD. Industrial firms produce real goods or services while FIs only manipulate moneyE. 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 businessB. Secondary security, because mortgages are typically resold in the secondary marketC. Primary security, because the mortgage I.O.U. is a newly created securityD. Secondary security for resales of existing homes and a primary security for new home salesE. 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 eventsB. Financial intermediation has become more costly because it is now necessary to invest in high cost

technologyC. Financial intermediation has been unaffectedD. Financial intermediation has become more costly as global firms exploit economies of scale and

scopeE. 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 capitalB. Restrict the number of activities permitted by FIs, thereby increasing potential profitsC. Restrict the number of FIs that can operate in a given marketD. Answers A and BE. 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 FIsB. They prefer to invest in longer term securitiesC. They are subject to price risk on the sale of securitiesD. Answers A and BE. Answers A and C


67. FIs perform their intermediary function in two ways

A. They specialize as brokers between savers and usersB. They serve as asset transformers by purchasing primary securities and issuing secondary securitiesC. They serve as asset transformers by purchasing secondary securities and issuing primary securitiesD. Answers A and BE. Answers A and C


68. Which of the following is true of secondary securities? A. They include equities, bonds and other debt claimsB. They are backed by the real assets of corporations issuing themC. They are securities that back primary securitiesD. They are securities issued by FIsE. 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 policyB. Credit allocationC. Intergenerational wealth transfers or time intermediationD. Denomination intermediationE. 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 sectorsB. Transmission of monetary policy from the Federal Reserve to the economyC. Ensure the safety and soundness of the FID. Prevent discrimination in lending on the basis of age, race, sex or incomeE. 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 regulationB. Safety and soundness regulationC. Entry regulationD. Credit allocation regulationE. Consumer protection regulation


72. The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to help

meet the A. Entry regulationB. Credit allocation regulationC. Investor protection regulationD. Safety and soundness regulationE. Consumer protection regulation


73. Price and quantity restrictions in regulation usually are aimed at determining whether an FI is meeting certain A. Consumer protection guidelinesB. Credit allocation guidelinesC. Investor protection guidelinesD. Safety and soundness guidelinesE. 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 failureB. Encouraging banks to limit lending to a single customer to no more than 10% of capitalC. To provide deposit insuranceD. To monitor banks periodicallyE. 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 securitiesB. Allowed large investors to trade privately placed securities among themselvesC. Defined large investors allowed to trade privately placed securities as those with assets greater than

$400 millionD. Gave small savers access to the private placement marketE. Answers A and C


76. Safety and soundness regulations include all of the following layers of protection except

A. The provision of guaranty fundsB. Requirements encouraging diversification of assetsC. The creation of money for those FIs in financial troubleD. Minimum levels of capitalE. 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 banksB. ThriftsC. Life insurance companiesD. Investment companiesE. 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 Summary

Category # of Questions

Saunders - Chapter 01 78