FIN 305 ACTUAL FINAL EXAM 2 WITH COMPLETE QUESTIONS
AND CORRECT DETAILED ANSWERS\ACTUAL EXAM
COMPLETE QUESTIONS AND CORRECT DETAILED ANSWERS
(100% CORRECT VERIFIED SOLUTIONS) A NEW UPDATED
VERSION |ALREADY GRADED A+
financial intermediation
instead of savers lending/investing directly with borrowers, a financial
intermediary such as the bank plays a middle man
financial institutions
perform the essential functions of channeling funds from those with
surplus funds (suppliers of funds) to those with shortages of funds
types of FIs include
depository institutions, insurance companies, pension funds,
investment intermediaries
___ are for more important source of financing for corporations than
securities markets are
financial intermediaries
,the 8 stylized facts
1. Stocks are not the most important source of external
financing for businesses
2. Issuing marketable debt and equity securities is not the primary
way in which businesses finance their operations
3. indirect finance which involves the activities of financial
intermediaries is many times more important than direct finance
4. financial intermediaries, particulary banks, are the most important
source of external funds used to finance businesses
5. the financial system is among the most heavily regulated
sectors of economy
6. only large, well established corporations have easy access to
securities markets to finance their activities
7. collateral is a prevalent feature of debt contracts for both
households and businesses
8. debt contracts are typically extremely complicated legal
documents that place substantial restrictions on the behavior of
the borrowers
why are financial instituions so important?
transaction costs, risk sharing, asymmetric information
transaction costs
time and money spent in carrying out financial transactions
,how do FIs reduce transaction costs
developing expertise and exploiting economies of scale
economies of scale
cost advantages a firm gains due to its size or increased output,
where average cost per unit decreases as production volume
increases
low transaction costs --> EOS
FIs can provide customers with liquidity services, services that make
it easier for customers to conduct transactions
low transaction cost --> risk sharing
can help reduce the exposure of investors to risk
asset transformation
FIs create and sell assets with lesser risk to one party in order to buy
assets with greater risk from another party
maturity transformation
converting short term liabilities (like demand deposits) into long term
assets (like mortgage and business loans)
, risk transformation
pooling risks across many investments to create products with different
risk profiles
liquidity transformation
converting illiquid assets into liquid liabilities
e.g. banks issuing certificates of deposit backed by small business
loans, or money market funds creating check-writing privileges
backed by commercial paper
denomination transformation
breaking large investments into smaller units accessible to more
investors
s&l crisis
1982-1992 resulted in the failure of nearly half of all savings
institutions 1248 failures, peaking at 316 in 1989
real estate prices in Texas and the southwest collapsed (many
mortgages defaulted)
AND CORRECT DETAILED ANSWERS\ACTUAL EXAM
COMPLETE QUESTIONS AND CORRECT DETAILED ANSWERS
(100% CORRECT VERIFIED SOLUTIONS) A NEW UPDATED
VERSION |ALREADY GRADED A+
financial intermediation
instead of savers lending/investing directly with borrowers, a financial
intermediary such as the bank plays a middle man
financial institutions
perform the essential functions of channeling funds from those with
surplus funds (suppliers of funds) to those with shortages of funds
types of FIs include
depository institutions, insurance companies, pension funds,
investment intermediaries
___ are for more important source of financing for corporations than
securities markets are
financial intermediaries
,the 8 stylized facts
1. Stocks are not the most important source of external
financing for businesses
2. Issuing marketable debt and equity securities is not the primary
way in which businesses finance their operations
3. indirect finance which involves the activities of financial
intermediaries is many times more important than direct finance
4. financial intermediaries, particulary banks, are the most important
source of external funds used to finance businesses
5. the financial system is among the most heavily regulated
sectors of economy
6. only large, well established corporations have easy access to
securities markets to finance their activities
7. collateral is a prevalent feature of debt contracts for both
households and businesses
8. debt contracts are typically extremely complicated legal
documents that place substantial restrictions on the behavior of
the borrowers
why are financial instituions so important?
transaction costs, risk sharing, asymmetric information
transaction costs
time and money spent in carrying out financial transactions
,how do FIs reduce transaction costs
developing expertise and exploiting economies of scale
economies of scale
cost advantages a firm gains due to its size or increased output,
where average cost per unit decreases as production volume
increases
low transaction costs --> EOS
FIs can provide customers with liquidity services, services that make
it easier for customers to conduct transactions
low transaction cost --> risk sharing
can help reduce the exposure of investors to risk
asset transformation
FIs create and sell assets with lesser risk to one party in order to buy
assets with greater risk from another party
maturity transformation
converting short term liabilities (like demand deposits) into long term
assets (like mortgage and business loans)
, risk transformation
pooling risks across many investments to create products with different
risk profiles
liquidity transformation
converting illiquid assets into liquid liabilities
e.g. banks issuing certificates of deposit backed by small business
loans, or money market funds creating check-writing privileges
backed by commercial paper
denomination transformation
breaking large investments into smaller units accessible to more
investors
s&l crisis
1982-1992 resulted in the failure of nearly half of all savings
institutions 1248 failures, peaking at 316 in 1989
real estate prices in Texas and the southwest collapsed (many
mortgages defaulted)
