T/F Questions

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

False

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

False

The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.

False

The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.

False

The value of assets is the traditional measure of size in the securities brokerage and investment banking industry.

False

Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as stocks and bonds.

False

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

False

A change from commercial bank deposits to money market mutual funds typically allows an investor to benefit from higher yields, but with the cost of losing deposit insurance coverage.

True

A finance company that lends money to high-risk customers is known as a subprime lender.

True

A major role of the captive finance company is to provide financing for the purchase of products manufactured or sold by the parent company.

True

Activity and performance trends in the investment banking industry are highly correlated with general economic expansions and recessions.

True

Agency transactions of market makers are two-way transactions on behalf of customers

True

All classes of mutual fund shares may legally charge an annual 12b-1 fee.

True

As a delegated monitor, an FIs actions reduce agency costs

True

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

True

As compared to venture capital firms, private equity firms specialize in assisting existing companies that have proven themselves in their industry.

True

Bad debt expense and administrative costs are lower on home equity loans than other typical loans of finance companies.

True

Because finance companies do not accept deposits, they do not have bank regulators providing oversight of their activities.

True

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

By converting to a bank holding company, an investment bank gains access to Federal Reserve lending facilities.

True

Commercial banks in the U.S. often are subject to several of the four regulatory agencies.

True

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

True

Electronic brokerage allows an investor to have direct access to the trading floor.

True

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

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

True

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

True

Finance companies differ from banks in that they do not accept deposits

True

Finance companies have relied primarily on short-term commercial paper and other debt sources to finance asset growth.

True

Financial Institutions act as intermediaries between suppliers and demanders of money.

True

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

True

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

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

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

True

In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by U.S. households.

True

Initial public offerings (IPOs) are first-time issues of firms whose equity has not previously traded in an organized market.

True

Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring.

True

Investment banks specialize in the organization, underwriting, and distribution of new securities issued by corporations or governments

True

Market makers in an NYSE stock are obligated to buy shares from sellers even when the market for the stock is declining.

True

Money market mutual funds have attracted large amounts of retail savings and retail time deposits from commercial banks in recent years.

True

Most individuals who invest in mutual funds for the first time realize that mutual fund investments carries some risk.

True

Most securities firms are subject to large amounts of interest rate and market risk because of the large amount financial assets on the balance sheet.

True

Mutual funds achieve economies of scale for individual investors by realizing the benefits of lower transaction costs and commissions as compared to those incurred by individual investors.

True

Mutual funds are financial intermediaries that invest in diversified portfolios of assets

True

One of the goals of mutual funds is to achieve superior diversification through fund and risk pooling compared to what individual investors can achieve.

True

One reason for the increasing proportion of total financial assets controlled by pension funds and investment companies is that these intermediaries exploit the comparative advantages of size and diversification.

True

Open-end mutual funds are the major type of mutual funds

True

Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.

True

Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.

True

Securitized mortgage assets are used as collateral backing secondary market securities.

True

Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.

True

Small banks make proportionately larger amounts of real estate loans than large banks.

True

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

True

The Financial Services Modernization Act of 1999 allowed investment banks and securities firms to offer deposit accounts to individuals.

True

The Financial Services Modernization Act of 1999 allows commercial banking activities and securities underwriting to operate simultaneously under the same ownership structure.

True

The Financial Services Modernization Act of 1999 and other regulatory changes have been the cause of the increase in inter-industry mergers of investment banks and securities firms.

True

The Internet has allowed individual investors to purchase securities while benefiting from decreased transactions costs.

True

The SEC requires that prospectuses or advertisements regarding a mutual fund contain information that returns of the mutual fund carry some risk.

True

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

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

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

True

The goal of the Sarbanes-Oxley Act is to prevent deceptive accounting and management practices and thus to increase confidence in corporate governance.

True

The growth of the commercial paper market has led to a decline in the demand for business loans from commercial banks.

True

The largest source of funding for securities service firms and investment banks as an industry is repurchase agreements.

True

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

True

The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is dependent on the occurrence of a contingent event.

True

The objective of the investment function of securities firms (funds management) is to allocate assets so that they outperform relative risk-return performance benchmark.

True

The parent institution provides a large portion of the debt that a captive finance company will use to generate personal loans.

True

The return from investing in mutual funds can include dividends, gains from the sale of the mutual fund assets, and gains from the sale of the mutual fund shares.

True

The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.

True

Unfairly excluding some potential financial service consumers from the financial services marketplace is a reason why FIs must absorb net regulatory burden.

True

When a finance company pools mortgages with similar characteristics and securitizes the pool, the loans are removed from the balance sheet of the finance company.

True

Wholesale and retail motor vehicle loans and leases constitute the largest subcategory of business loans.

True

A major difference between banks and other nonfinancial firms is the low amount of leverage in commercial banks.

False

All commercial banks must be members of the Federal Reserve System.

False

An FI is exposed to liquidity risk because the average maturity of assets and the average maturity of liabilities are often different on the FIs balance sheet.

False

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

False

Because of the large amount of equity on a typical commercial bank balance sheet, credit risk is not a significant risk to bank managers.

False

Cash management accounts were an early attempt by commercial banks to provide investment-banking services to individuals.

False

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

False

Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.

False

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

False

Factoring is the process where accounts are purchased by a nonfinancial company at a discount from their face value in exchange for the responsibility of collection.

False

Finance companies generally attract less risky customers than do commercial banks.

False

In an attempt to enhance the net social welfare benefits of the services provided by financial intermediaries, safety and soundness regulation requires a DI to hold a minimum level of cash reserves against deposits.

False

In pure arbitrage, a trader would sell an asset in one market at one price while buying the same asset in another market at a higher price.

False

In recent years, the number of commercial banks in the U.S. has been increasing

False

It is impossible for an individual to be approved for a finance company loan with a bankruptcy on their record.

False

Large banks tend to make business decisions based on personal knowledge of customers creditworthiness and business conditions in the local communities.

False

Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts.

False

Sales finance companies do not directly compete with depository institutions for consumer loans.

False

Secondary securities are securities that serve as collateral for primary securities

False

Securities underwriting and trading is an activity that requires a considerable investment in long- term assets and relatively small investments in short-term assets.

False

The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.

False

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

False

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

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

False

The maturity structure of the assets of commercial banks tends to be shorter than the maturity structure of liabilities.

False

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

False

The primary objective of the 1933 Glass-Steagall Act was to prevent commercial banks from competing directly with commercial insurance companies.

False

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

False