Financial Institutions Management: A Risk Management Approach 10th Edition by Anthony Saunders Test
Chapter 01 Why Are Financial Institutions Special?
KEY
1. Currently (2015) J.P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.
FALSE
2. As of 2015, U.S. FIs held assets totaling over $29 trillion
TRUE
3. Financial institutions act as intermediaries between suppliers and users of money.
TRUE
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
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
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
7. The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.
FALSE
8. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.
FALSE
9. FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.
FALSE
10. 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
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.
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
13. Financial institutions are subject to economies of scale in the collection of information.
TRUE
14. Compared to households, FIs often have economies of scale when purchasing or selling securities issued by businesses and governments.
TRUE
15. As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.
TRUE
16. The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing secondary claims issued by households and other investors.
FALSE
17. Secondary securities are securities that serve as collateral for primary securities.
FALSE
18. FIs are independent market entities that create financial assets whose value is the transformation of financial risk.
TRUE
19. The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.
FALSE
20. As a delegated monitor, an FI's actions reduce agency costs.
TRUE
21. Because FIs remove imperfections between households and corporations, households tend to save more than they would if FIs did not exist.
TRUE
22. 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
23. Research shows that there is a significant reduction in risk achieved by investing in as few as 6 different securities.
FALSE
24. By diversifying investments, an FI is able to more accurately predict the expected return on its asset portfolio.
TRUE
25. Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.
TRUE
26. The liabilities of depository institutions are significant components of the money supply.
TRUE
27. The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.
FALSE
28. Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.
FALSE
29. The qualified thrift lender test is used to determine whether an institution is classified as a Savings Institution (Thrift).
TRUE
30. Commercial banks and finance companies have traditionally served the needs of the residential real estate market.
FALSE
31. The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.
KEY
1. Currently (2015) J.P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.
FALSE
2. As of 2015, U.S. FIs held assets totaling over $29 trillion
TRUE
3. Financial institutions act as intermediaries between suppliers and users of money.
TRUE
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
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
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
7. The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.
FALSE
8. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.
FALSE
9. FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.
FALSE
10. 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
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.
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
13. Financial institutions are subject to economies of scale in the collection of information.
TRUE
14. Compared to households, FIs often have economies of scale when purchasing or selling securities issued by businesses and governments.
TRUE
15. As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.
TRUE
16. The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing secondary claims issued by households and other investors.
FALSE
17. Secondary securities are securities that serve as collateral for primary securities.
FALSE
18. FIs are independent market entities that create financial assets whose value is the transformation of financial risk.
TRUE
19. The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.
FALSE
20. As a delegated monitor, an FI's actions reduce agency costs.
TRUE
21. Because FIs remove imperfections between households and corporations, households tend to save more than they would if FIs did not exist.
TRUE
22. 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
23. Research shows that there is a significant reduction in risk achieved by investing in as few as 6 different securities.
FALSE
24. By diversifying investments, an FI is able to more accurately predict the expected return on its asset portfolio.
TRUE
25. Depository institutions serve as the primary conduit through which monetary policy actions impact the economy.
TRUE
26. The liabilities of depository institutions are significant components of the money supply.
TRUE
27. The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.
FALSE
28. Credit allocation regulations are typically designed to benefit customers as well as the financial institution that must implement the guidelines.
FALSE
29. The qualified thrift lender test is used to determine whether an institution is classified as a Savings Institution (Thrift).
TRUE
30. Commercial banks and finance companies have traditionally served the needs of the residential real estate market.
FALSE
31. The Federal Reserve mandates reserve requirements for depository institutions so that the DIs may provide payment services for the U.S. economy.