Financial Institution
Section (6)
Chapter (2), An Overview of the Financial System, Con
True or False:
1) Another benefit made possible by the FI’s low transaction costs is
that they can help reduce the exposure of investors to risk, through a
process known as transaction costs. ( )
2) FIs create and sell assets with lesser risk to one party in order to buy
assets with greater risk from another party. This process is referred to
as asset transformation. ( )
3) Financial intermediaries help by providing the means for individuals
and businesses to diversify their asset holdings. ( )
4) Another reason FIs exist is to increase the impact of asymmetric
information. ( )
5) Adverse Selection is occurring before the transaction occurs while,
Moral Hazard is occurring after the transaction occurs. ( )
6) Adverse Selection in which the borrower has incentives to engage in
undesirable (immoral) activities making it more likely that won’t pay
loan back. ( )
7) Financial intermediaries reduce adverse selection and moral hazard
problems, enabling them to make profits. ( )
8) FIs are able to lower the production cost of information by using the
information for multiple services. This is called economies of scope. (
)
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9) S&Ls (Savings and Loans) raise funds primarily by issuing checkable,
savings, and time deposits which are used to make commercial,
consumer, and mortgage loans while, Commercial banks raise funds
primarily by issuing savings, time, and checkable deposits which are
most often used to make mortgage. ( )
10) Life Insurance Companies receive funds from policy premiums, can
invest in less liquid corporate securities and mortgages while, Fire and
Casualty Insurance Companies receive funds from policy premiums,
must invest most in liquid government and corporate securities. ( )
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MCQ:
1) Economies of scale enable financial institutions to
A. reduce transactions costs.
B. avoid the asymmetric information problem.
C. eliminate the need to diversify.
D. reduce moral hazard.
E. avoid adverse selection problems.
2) Reducing risk through the purchase of assets whose returns do not
always move together is
A. disintermediation.
B. intermediation.
C. intervention.
D. discounting.
E. diversification.
3) Typically, borrowers have superior information relative to lenders
about the potential returns and risks associated with an investment
project. The difference in information is called __________, and it
creates the __________ problem.
A. adverse selection; moral hazard
B. asymmetric information; risk sharing
C. asymmetric information; adverse selection
D. adverse selection; risk sharing
E. moral hazard; adverse selection
4) A potential borrower usually has better information about the
potential returns and risk of the investment projects he plans to
undertake than does the lender. This inequality of information is called
A. moral hazard.
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B. asymmetric information.
C. reverse causation.
D. adverse selection
5) If bad credit risks are the ones who most actively seek loans and,
therefore, receive them from financial intermediaries, then financial
intermediaries face the problem of
A. moral hazard.
B. adverse selection.
C. free-riding.
D. costly state verification.
6) The problem created by asymmetric information before the
transaction occurs is called _____, while the problem created after the
transaction occurs is called _____.
A. adverse selection; moral hazard
B. moral hazard; adverse selection
C. costly state verification; free-riding
D. free-riding; costly state verification
7) The presence of _____ in financial markets leads to adverse selection
and moral hazard problems that interfere with the efficient functioning
of financial markets.
A. noncollateralized risk
B. free-riding
C. asymmetric information
D. costly state verification
8) Studies of the major developed countries show that when businesses
go looking for funds to finance their activities they usually obtain these
funds from
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A. government agencies.
B. equities markets.
C. financial intermediaries.
D. bond markets.
9) Which of the following financial intermediaries is not a depository
institution?
A. A savings and loan association
B. A commercial bank
C. A credit union
D. A finance company
E. None of the above
10) Which of the following is a contractual savings institution?
A. A life insurance company
B. A credit union
C. A savings and loan association
D. A mutual fund
11) Contractual savings institutions include
A. mutual savings banks.
B. money market mutual funds.
C. commercial banks.
D. life insurance companies.
E. all of the above.
12) Which of the following are investment intermediaries?
A. Finance companies
B. Mutual funds
C. Pension funds
D. All of the above
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E. Only (a) and (b) of the above
14) Which of the following are investment intermediaries?
A. Finance companies
B. Mutual funds
C. Pension funds
D. All of the above
E. Only (a) and (b) of the above
