FINA 465 CHAPTER 1,2, 4, 5 EXAM QUESTIONS AND
CORRECT DETAILED ANSWERS (VERIFIED ANSWERS)
ALREADY GRADED A+
What are five risks common to all financial institutions?
Ans✓✓✓1.default or credit risk of assets,
2.interest rate
3.maturity mismatches between assets and liabilities,
4. liability withdrawal
5.liquidity risk, underwriting risk, and operating risks
Explain how economic transactions between household savers of funds
and corporate users of funds would occur in a world without financial
institutions. Ans✓✓✓- FI's would have to approach households directly
- Fund flows between households and corporation very low due to high
monitoring costs for households.
- Low monitoring would result in a lack of monitoring would reduce
attractiveness and increase risk of investing.
3 economic disincentives that would dampen the flow to funds between
household savers and corporate users of funds in a world without Fi's
Ans✓✓✓1. Monitoring Costs- requires extensive time, expense and
expertise. The lack of monitoring by those who wouldn't would increase
the risk.
2. liquidity costs- the long-term nature of corporate bonds would deter
those who prefer liquid assets
, 3.Price risk- increases due to the lack of information flows from high
volume
2 Functions of FI's that enable the smooth flow of funds from
households to corporate users Ans✓✓✓Brokerage Function- transaction
services from savers to borrowers, can offer advisory services which
reduce information costs.
Asset transformation- issues their own securities (ex. deposits, insurance
policies) attractive to savers and they then borrow to primary
corporation securities
Primary Securities Ans✓✓✓funds raised by Fi's issued by commercial
corporations
Secondary securities Ans✓✓✓FI's financial claim to the corporations
primary securities
How does the transformations process reduce risk for savers?
Ans✓✓✓FI's buy the primary securities from the corporations who sell
their claim to the securities (secondary securities) to household savers (
who are indirectly investing in them). The efficiencies of the FI's reduce
the costs to the household saver.
CORRECT DETAILED ANSWERS (VERIFIED ANSWERS)
ALREADY GRADED A+
What are five risks common to all financial institutions?
Ans✓✓✓1.default or credit risk of assets,
2.interest rate
3.maturity mismatches between assets and liabilities,
4. liability withdrawal
5.liquidity risk, underwriting risk, and operating risks
Explain how economic transactions between household savers of funds
and corporate users of funds would occur in a world without financial
institutions. Ans✓✓✓- FI's would have to approach households directly
- Fund flows between households and corporation very low due to high
monitoring costs for households.
- Low monitoring would result in a lack of monitoring would reduce
attractiveness and increase risk of investing.
3 economic disincentives that would dampen the flow to funds between
household savers and corporate users of funds in a world without Fi's
Ans✓✓✓1. Monitoring Costs- requires extensive time, expense and
expertise. The lack of monitoring by those who wouldn't would increase
the risk.
2. liquidity costs- the long-term nature of corporate bonds would deter
those who prefer liquid assets
, 3.Price risk- increases due to the lack of information flows from high
volume
2 Functions of FI's that enable the smooth flow of funds from
households to corporate users Ans✓✓✓Brokerage Function- transaction
services from savers to borrowers, can offer advisory services which
reduce information costs.
Asset transformation- issues their own securities (ex. deposits, insurance
policies) attractive to savers and they then borrow to primary
corporation securities
Primary Securities Ans✓✓✓funds raised by Fi's issued by commercial
corporations
Secondary securities Ans✓✓✓FI's financial claim to the corporations
primary securities
How does the transformations process reduce risk for savers?
Ans✓✓✓FI's buy the primary securities from the corporations who sell
their claim to the securities (secondary securities) to household savers (
who are indirectly investing in them). The efficiencies of the FI's reduce
the costs to the household saver.
