Question 1

When a DI makes a shift from an 'originate-to-hold' banking model to an 'originate-to-distribute' banking model, the change is likely to result in:

Accepted Answer

A)  increased operating costs.
B)  increased interest rate and liquidity risk.
C)  decreased monitoring costs.
D)  decreased fee income.E) A) and B)
F) All of the above

Question 2

Which of the following statements is true?

Accepted Answer

A)  The more diversified a financial intermediary, the higher the probability that it will default on its obligations and the more risky and illiquid the claims.
B)  The less diversified a financial intermediary, the higher the probability that it will default on its obligations and the more risky and illiquid the claims.
C)  The more diversified a financial intermediary, the lower the probability that it will default on its obligations and the more risky but also the more liquid the claims.
D)  The more diversified a financial intermediary, the higher the probability that it will default on its obligations and the more risky but also the more liquid the claims.E) B) and C)
F) C) and D)

Question 3

What are the entry costs for the financial intermediation sector in Australia? Would you consider entry to be easy or difficult? Explain.

Accepted Answer

Increasing or decreasing the cost of ent...

Question 4

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 5

Which of the following statements is true regarding the percentage share of assets of financial institutions in Australia as of end June 2005?

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.E) All of the above
F) C) and D)

Question 6

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.E) A) and D)
F) None of the above

Question 7

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.E) A) and C)
F) C) and D)

Question 8

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

Accepted Answer

A) True 
 B)False

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.E) A) and C)
F) A) and B)

Question 10

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?

Accepted Answer

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) None of the above
F) B) and D)

Question 11

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.E) A) and B)
F) A) and C)

Question 12

Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following except:

Accepted Answer

A)  monitoring done by the bank on your behalf.
B)  increased liquidity if funds are needed quickly.
C)  increased transactions costs.
D)  less price risk when funds are needed.E) A) and C)
F) A) and B)

Question 13

A loan covenant is:

Accepted Answer

A)  a legal clause in a borrowing contract that requires the lender to avoid certain actions.
B)  a legal clause in a borrowing contract that requires the lender to take certain actions.
C)  a legal clause in a borrowing contract that requires the borrower to take certain actions.
D)  a legal clause in a borrowing contract that requires the borrower to either take certain actions or avoid certain actions.E) A) and B)
F) A) and C)

Question 14

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

Question 15

Agency costs are costs relating to the risk that the owners and managers of firms that receive savers' funds will take action with those funds contrary to the best interests of the saver.

Accepted Answer

A) True 
 B)False

Question 16

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.E) None of the above
F) C) and D)

Question 17

FIs perform their intermediary function in two ways:

Accepted Answer

A)  They specialise 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)  They specialise as brokers between savers and users and they serve as asset transformers by purchasing primary securities and issuing secondary securities.E) None of the above
F) B) and C)

Question 18

Which of the following is an adequate definition of a delegated monitor?

Accepted Answer

A)  An economic agent appointed to act on behalf of large groups of agents in collecting information and/or investing funds.
B)  An economic agent appointed to act on behalf of large groups of principals in collecting information and/or investing funds.
C)  An economic agent appointed to act on behalf of smaller agents in collecting information and/or investing funds.
D)  An economic agent appointed to act on behalf of smaller principals in collecting information and/or investing funds.E) B) and D)
F) B) and C)

Question 19

Why are financial institutions special? Give three concrete examples.

Accepted Answer

Financial institutions are considered sp...

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.E) C) and D)
F) B) and D)

Exam 1: Why Are Financial Institutions Special

FIs perform their intermediary function in two ways:

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Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following except:

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Which of the following statements is true?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When a DI makes a shift from an 'originate-to-hold' banking model to an 'originate-to-distribute' banking model, the change is likely to result in:

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is true regarding the percentage share of assets of financial institutions in Australia as of end June 2005?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?

Correct AnswerverifiedShow Answer

Why are financial institutions special? Give three concrete examples.

Correct AnswerverifiedFinancial institutions are considered sp...View AnswerShow Answer

Economies of scale is the concept that:

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What are the entry costs for the financial intermediation sector in Australia? Would you consider entry to be easy or difficult? Explain.

Correct AnswerverifiedIncreasing or decreasing the cost of ent...View AnswerShow Answer

A loan covenant is:

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Secondary securities are securities issued by FIs and backed by:

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Agency costs are costs relating to the risk that the owners and managers of firms that receive savers' funds will take action with those funds contrary to the best interests of the saver.

Correct AnswerverifiedShow Answer

Which of the following is an adequate definition of a delegated monitor?

Correct AnswerverifiedShow Answer

Price risk refers to:

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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Financial institutions are considered sp...
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Increasing or decreasing the cost of ent...
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