Financial Institutions

Topics: Financial services, Bank, Investment Pages: 43 (7705 words) Published: October 16, 2011
Chapter 01
Why Are Financial Institutions Special?

True / False Questions

1. Prior to the financial crisis of 2007-2008, J.P. Morgan Chase was the largest bank holding company in the world and operations in 60 countries.  True    False


2. As of 2009, U.S. FIs held assets totaling over $35 trillion.  True    False


3. Financial institutions act as intermediaries between suppliers and demanders of money.  True    False


4. If a household invests in corporate securities and does not supervise how the funds are invested or used by the corporation, the risk of not earning the desired return or not having the funds returned increase.  True    False


5. 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


6. 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


7. 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


8. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.  True    False


9. FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.  True    False


10. Because the average maturity of assets and the average maturity of liabilities are often different on an FI's balance sheet, the FI is exposed to liquidity risk.  True    False


11. When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.  True    False


12. An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale and provide this service more efficiently than either the saver or borrower could on their own.  True    False


13. Financial institutions are subject to economies of scale in the collection of information.  True    False


14. As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.  True    False


15. 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


16. Secondary securities are securities that serve as collateral for primary securities.  True    False


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


18. The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.  True    False


19. As a delegated monitor, an FI's actions reduce agency costs.  True    False


20. The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.  True    False


21. Research shows that there is a significant reduction in risk achieved by investing in as few as 8 different securities.  True    False


22. Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.  True    False


23. The liabilities of depository institutions are significant components of the money supply.  True    False


24. The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.  True    False


25. Credit allocation regulations are typically designed to benefit customers as well as the financial...
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