Chapter 01
Why Are Financial Institutions Special?
True / False Questions
1. Currently (2012) J.P. Morgan Chase is the largest bank holding company in the world and
operations in 60 countries.
True False
2. As of 2012, U.S. FIs held assets totaling over $27 trillion
True False
3. Financial institutions act as intermediaries between suppliers and demanders of money.
True False
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 False
,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 False
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 False
7. The risk that the sale price of an asset will be less than the purchase price of an asset is
called liquidity risk.
True False
8. Because bank loans have a shorter maturity than most debt contracts, FIs typically
exercise less monitoring power and control over the borrower.
True False
9. FIs typically provide secondary claims to household savers that have inferior liquidity than
primary securities of corporations such as equity and bonds.
True 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.
True 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.
True 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 False
13. Financial institutions are subject to economies of scale in the collection of information.
True False
14. As an asset transformer, the FI issues financial claims that are more attractive to
household savers than the claims directly issued by corporations.
True False
15. 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.
True False
16. Secondary securities are securities that serve as collateral for primary securities.
True False
17. FIs are independent market entities that create financial assets whose value is the
transformation of financial risk.
True False
, 18. The more costly it is to supervise the use of funds by a borrower, the less likely a saver
will encounter agency costs.
True False
19. As a delegated monitor, an FI's actions reduce agency costs.
True False
20. 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 False
21. Research shows that there is a significant reduction in risk achieved by investing in as
few as 8 different securities.
True False
22. Depository institutions serve as the primary conduit through which monetary policy
actions impact the economy.
True False
23. The liabilities of depository institutions are significant components of the money supply.
True False
24. The goal of credit allocation is the encouragement of FIs to diversity the composition of
their assets.
True False
Why Are Financial Institutions Special?
True / False Questions
1. Currently (2012) J.P. Morgan Chase is the largest bank holding company in the world and
operations in 60 countries.
True False
2. As of 2012, U.S. FIs held assets totaling over $27 trillion
True False
3. Financial institutions act as intermediaries between suppliers and demanders of money.
True False
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 False
,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 False
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 False
7. The risk that the sale price of an asset will be less than the purchase price of an asset is
called liquidity risk.
True False
8. Because bank loans have a shorter maturity than most debt contracts, FIs typically
exercise less monitoring power and control over the borrower.
True False
9. FIs typically provide secondary claims to household savers that have inferior liquidity than
primary securities of corporations such as equity and bonds.
True 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.
True 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.
True 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 False
13. Financial institutions are subject to economies of scale in the collection of information.
True False
14. As an asset transformer, the FI issues financial claims that are more attractive to
household savers than the claims directly issued by corporations.
True False
15. 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.
True False
16. Secondary securities are securities that serve as collateral for primary securities.
True False
17. FIs are independent market entities that create financial assets whose value is the
transformation of financial risk.
True False
, 18. The more costly it is to supervise the use of funds by a borrower, the less likely a saver
will encounter agency costs.
True False
19. As a delegated monitor, an FI's actions reduce agency costs.
True False
20. 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 False
21. Research shows that there is a significant reduction in risk achieved by investing in as
few as 8 different securities.
True False
22. Depository institutions serve as the primary conduit through which monetary policy
actions impact the economy.
True False
23. The liabilities of depository institutions are significant components of the money supply.
True False
24. The goal of credit allocation is the encouragement of FIs to diversity the composition of
their assets.
True False
