FIN 390 EXAM 1 & 2 STUDY GUIDE
Information Costs - Answers - the relatively large size of the FI allows this collection of
information to be accomplished at a lower average cost than would be the case for
individuals.
Liquidity - Answers - the ease with which an asset can be converted into cash
Price risk - Answers - the risk that an asset's sale price will be lower than its purchase
price
economies of scale - Answers - the concept that the cost reduction in trading and other
transaction services results in increased efficiency when FIs perform these services
asset transformer - Answers - an FI issues financial claims that are more attractive to
household savers than the claims directly issued by corporations
primary securities - Answers - securities issued by corporations and back by the real
assets of those corporations
secondary securities - Answers - securities issued by FIs and backed by primary
securities
agency costs - Answers - costs relating to the risk that the owners and managers of
firms that receive savers' funds will take actions with those funds contrary to the best
interests of the savers
delegated monitor - Answers - an economic agent appointed to act on behalf of smaller
investors in collecting information and/or investing funds on their behalf
diversity - Answers - reducing risk by holding a number of different securities in a
portfolio
negative externalities - Answers - action by an economic agent imposing costs on other
economic agents
net regulatory burden - Answers - the difference between the private costs of
regulations and the private benefits for the producers of financial services
outside money - Answers - the part of the money supply directly produced by the
government or central bank, such as notes and coin
inside money - Answers - the part of the money supply produced by the private banking
system
, Enterprise Risk Management - Answers - recognizes the importance of managing the
full spectrum of risks as an interrelated risk portfolio
commercial bank - Answers - a bank that accepts deposits and makes consumer,
commercial, and real estate loans
community banks - Answers - banks that specialize in retail or consumer banking
regional or superregional banks - Answers - banks that engage in a complete array of
wholesale commercial banking activities
federal funds market - Answers - an interbank market for short-term borrowing and
lending of bank reserves
money center banks - Answers - banks that have a heavy reliance on non-deposit or
borrowed sources of funds
spreads - Answers - the difference between lending and deposit rates
transaction accounts - Answers - the sum of non-interest-bearing demand deposits and
interest-bearing checking accounts
NOW accounts - Answers - interest bearing checking accounts
money market mutual funds - Answers - specialized mutual funds that offer deposit like
interest bearing claims to savers
negotiable CDs - Answers - Fixed-maturity interest-bearing deposits with face values
over $100,000 that can be resold in the secondary market.
off balance sheet asset - Answers - an item that moves onto the asset side of the
balance sheet when a contingent event occurs
off balance sheet liability - Answers - an item that moves onto the liability side of the
balance sheet when a contingent event occurs
dual banking system - Answers - The coexistence of both nationally and state-chartered
banks, as in the United States.
holding companies - Answers - parent companies that own a controlling interest in
subsidiary banks or other FIs
nonbank banks - Answers - firms that undertake many of the activities of a commercial
bank without meeting the legal definition of a bank
Information Costs - Answers - the relatively large size of the FI allows this collection of
information to be accomplished at a lower average cost than would be the case for
individuals.
Liquidity - Answers - the ease with which an asset can be converted into cash
Price risk - Answers - the risk that an asset's sale price will be lower than its purchase
price
economies of scale - Answers - the concept that the cost reduction in trading and other
transaction services results in increased efficiency when FIs perform these services
asset transformer - Answers - an FI issues financial claims that are more attractive to
household savers than the claims directly issued by corporations
primary securities - Answers - securities issued by corporations and back by the real
assets of those corporations
secondary securities - Answers - securities issued by FIs and backed by primary
securities
agency costs - Answers - costs relating to the risk that the owners and managers of
firms that receive savers' funds will take actions with those funds contrary to the best
interests of the savers
delegated monitor - Answers - an economic agent appointed to act on behalf of smaller
investors in collecting information and/or investing funds on their behalf
diversity - Answers - reducing risk by holding a number of different securities in a
portfolio
negative externalities - Answers - action by an economic agent imposing costs on other
economic agents
net regulatory burden - Answers - the difference between the private costs of
regulations and the private benefits for the producers of financial services
outside money - Answers - the part of the money supply directly produced by the
government or central bank, such as notes and coin
inside money - Answers - the part of the money supply produced by the private banking
system
, Enterprise Risk Management - Answers - recognizes the importance of managing the
full spectrum of risks as an interrelated risk portfolio
commercial bank - Answers - a bank that accepts deposits and makes consumer,
commercial, and real estate loans
community banks - Answers - banks that specialize in retail or consumer banking
regional or superregional banks - Answers - banks that engage in a complete array of
wholesale commercial banking activities
federal funds market - Answers - an interbank market for short-term borrowing and
lending of bank reserves
money center banks - Answers - banks that have a heavy reliance on non-deposit or
borrowed sources of funds
spreads - Answers - the difference between lending and deposit rates
transaction accounts - Answers - the sum of non-interest-bearing demand deposits and
interest-bearing checking accounts
NOW accounts - Answers - interest bearing checking accounts
money market mutual funds - Answers - specialized mutual funds that offer deposit like
interest bearing claims to savers
negotiable CDs - Answers - Fixed-maturity interest-bearing deposits with face values
over $100,000 that can be resold in the secondary market.
off balance sheet asset - Answers - an item that moves onto the asset side of the
balance sheet when a contingent event occurs
off balance sheet liability - Answers - an item that moves onto the liability side of the
balance sheet when a contingent event occurs
dual banking system - Answers - The coexistence of both nationally and state-chartered
banks, as in the United States.
holding companies - Answers - parent companies that own a controlling interest in
subsidiary banks or other FIs
nonbank banks - Answers - firms that undertake many of the activities of a commercial
bank without meeting the legal definition of a bank
